The Securities and Exchange Board of India (SEBI) has proposed a relaxation in its newly announced index composition norms, a move that could prevent forced outflows of nearly $1 billion from HDFC Bank and ICICI Bank — the two largest constituents of the Nifty Bank index.
Why SEBI’s Move Matters
Currently, HDFC Bank holds a 29.1% weight and ICICI Bank accounts for 26.5% in the Nifty Bank index. Along with State Bank of India (SBI), which has an 8.7% weight, the three banks together represent over 64% of the index.
This level of concentration significantly exceeds SEBI’s newly introduced rules, which set limits on the maximum weight of individual stocks and the combined weight of top three constituents in non-benchmark indices. Without relaxation, index funds and ETFs tracking Nifty Bank would be forced to reduce exposure, triggering large-scale outflows.
SEBI’s New Norms for Non-Benchmark Indices
In May 2025, SEBI introduced new guidelines for indices other than the Sensex and Nifty 50, which include:
- 20% cap on individual stock weight.
- 45% cap on combined weight of top three constituents.
- Minimum of 14 stocks per index.
Since the Nifty Bank index currently has 12 constituents, it does not comply with these requirements, and would require reconstitution.
Estimated Outflows from Key Stocks
If implemented immediately, the rules could have led to sharp rebalancing. According to Sriram Velayudhan, Senior Vice President at IIFL Capital:
- HDFC Bank: Potential outflows of $553 million (₹4,815 crore).
- ICICI Bank: Potential outflows of $416 million (₹3,620 crore).
This capital would likely be redistributed to other banking stocks, with potential inflows estimated at:
- Kotak Mahindra Bank: $297 million.
- Axis Bank: $237 million.
- SBI: $201 million.
Similar rebalancing pressures would also impact indices such as the BSE Bankex and Nifty Financial Services.
SEBI’s Proposed Glide Path for Transition
To avoid market disruptions, SEBI has suggested a “glide path” approach — a phased implementation of index rebalancing spread over several months. This would give fund managers and market participants sufficient time to adjust portfolios, mitigating volatility.
SEBI is currently seeking stakeholder feedback before finalising the implementation timeline for the revised index norms.
Conclusion
SEBI’s flexibility on index composition rules comes as a relief to investors and market participants, particularly for those tracking the Nifty Bank index. By adopting a gradual transition instead of a sudden rebalancing, the regulator aims to strike a balance between reducing index concentration risk and maintaining market stability.
Disclaimer
This blog is for educational purposes only. The securities mentioned are examples and not stock recommendations. This does not constitute financial advice. Investors must conduct their own research and consult financial experts before making investment decisions.
Investments in securities market are subject to market risks, read all the related documents carefully before investing.