SEBI Seeks Public Comments on Eligibility Criteria for Derivatives on Non-Benchmark Indices
In order to prevent concentration of derivatives indices in a few stocks, markets regulator SEBI has invited public comments on a proposal for implementing eligibility criteria for non-benchmark indices. This move is aimed at promoting a more diversified and robust derivatives market in India.
Background and Context
In its circular issued in May, SEBI had mandated that non-benchmark indices eligible for derivatives must have a minimum of 14 constituents, with the top stock capped at 20% weight and the top three together at 45%. Further, stock weights must follow a descending order. This decision was taken to prevent the concentration of derivatives indices in a few stocks, which could lead to market volatility and undermine the integrity of the derivatives market.
Proposed Approaches
To comply with these norms, two approaches have been proposed: either launch new indices that meet the requirements while allowing existing ones to continue or modify existing indices by adjusting their constituents and weights. SEBI has sought public comments on whether existing indices should be adjusted instead of creating new ones and, if so, on the modalities of such adjustments.
Industry Reaction
BSE has one such index, BANKEX, with 10 constituents. As no exchange-traded funds track it, the bourse favours adjusting the weights directly. On the other hand, NSE has two indices — Nifty Bank, with 12 stocks and Rs 34,251 crore ETF assets under management, and Nifty Financial Services, with 20 constituents and Rs 511 crore AUM. The weight of some stocks in these indices currently ranges as high as 29-33%, while others are as low as 0.4-2%.
After discussions with mutual funds and industry representatives, NSE has also supported adjusting existing indices to avoid disruption, preserve liquidity, and maintain the brand identity of the benchmarks. However, given the significant ETF exposure, the exchange has suggested a phased, four-stage ‘glide path’ for Nifty Bank over four months, while adjustments in Nifty Financial Services could be carried out in one tranche.
Implications for Indian Investors
The proposed eligibility criteria for non-benchmark indices are expected to have a significant impact on the Indian derivatives market. By promoting a more diversified and robust derivatives market, SEBI aims to reduce the risk of market volatility and protect the interests of investors. Indian investors, particularly those who trade in derivatives, should carefully consider the proposed changes and provide their feedback to SEBI before the deadline of September 8.
Conclusion
In conclusion, the proposed eligibility criteria for non-benchmark indices are an important step towards promoting a more diversified and robust derivatives market in India. Indian investors should stay informed about the proposed changes and provide their feedback to SEBI to ensure that their interests are protected. As the Indian stock market continues to evolve, it is essential for investors to stay up-to-date with the latest developments and regulatory changes to make informed investment decisions.
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