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Summary: If you look at any capitalisation-weighted index, one problem stands out: a handful of stocks dominate. To even out the derivatives market, SEBI aims to curb this over-concentration in sectoral and thematic indices. Find out how this move will impact your passive fund investments.
Take a look at Nifty Bank and you’ll notice something obvious: a few big banks dominate the index. The same is true for Nifty Financial Services. This concentration has long been a problem, and SEBI has finally decided to act.
In a new consultation paper, SEBI has proposed rules to ensure that non-benchmark indices (mainly sectoral and thematic) with derivatives don’t get skewed towards a handful of stocks.
The new ground rules
Here’s what SEBI wants for such indices:
- At least 14 stocks in the basket.
- The biggest stock can’t have more than 20 per cent weight.
- The top three stocks together can’t cross 45 per cent weight.
- Weights must follow a proper descending order.
The aim is simple: derivative indices must be broad-based, not dominated by two or three giants.
What happens to existing indices
This poses a challenge. Popular sectoral indices like Nifty Bank (12 stocks), Nifty Financial Services (20 stocks) and BSE BANKEX (10 stocks) don’t pass these tests.
So what should be done?
- One option is to create new indices that comply.
- The other is to restructure the existing ones.
Both NSE and BSE favour the second option. Their reasoning: it preserves liquidity, avoids confusing investors with duplicate indices, and keeps intact the brand value built around existing indices.
The ETF angle
The bigger concern is for investors in ETFs and index funds.
- Around Rs 34,000 crore is invested in Nifty Bank ETFs/index funds, and about Rs 500 crore in Nifty Financial Services funds (as of June 2025).
- Creating entirely new indices would force these funds to switch, causing disruption.
- Restructuring existing indices, on the other hand, just means rebalancing portfolios.
SEBI’s paper suggests a phased approach. For smaller funds like those tracking Nifty Financial Services, changes can be done in one go. For large ones like Nifty Bank, weights will be adjusted gradually in four monthly steps to avoid sudden shocks.
What it means for you
If you hold a Nifty Bank ETF or Nifty Financial Services ETF, you may see some churn in the underlying portfolio over the next few months. Large banks like HDFC Bank, ICICI Bank and SBI will likely see their weights trimmed, while smaller banks may get a lift.
But in the long run, this is good for investors. It reduces concentration risk and makes your exposure more balanced.
The road ahead
This is only a consultation paper for now, with comments open till September 8, 2025. But the direction is clear: SEBI doesn’t want lopsided indices in the derivatives market anymore.
For investors, it means fewer surprises, less concentration, and healthier index structures.
Looking for mutual funds that can stand the test of time?
Regulatory shifts are part and parcel of the markets. To keep your portfolio resilient, you need a long-term vision, built on funds that are well-managed and aligned with your goals. That’s where Value Research Fund Advisor comes in. We offer personalised recommendations and guidance to help you stay on track with your investments.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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