Unique: SEBI could restrict focus of prime shares in index with derivatives

To allay the fears within the thoughts of the market ecosystem, capital market regulator Securities and Change Board of India (Sebi) is contemplating decreasing the weightage of prime shares within the sectoral index with by-product contracts. The regulator has appointed an knowledgeable working group led by the previous govt director of the Reserve Financial institution of India (RBI), G Padmanabhan, comprising officers from exchanges, clearing companies, brokers, private finance specialists, and folks from academia because the members.

What’s the proposal?

Based on one supply, “The proposal is at an early stage, and it’s being mentioned if prime constituent weightage may be restricted to 20-25 per cent and equally, the highest 3 may be restricted to a most of 50-60 per cent.” Additionally, it is being deliberated that if a sure absolute distinction within the weightage of the highest 5 constituents is required to have the gradation, the situation of a minimal of 10 shares could also be obligatory for such indices. It is proposed that for current indices, a brand new index could possibly be created to satisfy the brand new situations to supply derivatives on them.

Sebi’s whole-time member (WTM) and head of the Market Regulation Division, Ananth Narayan G, additionally indicated the transfer.

Whereas delivering his speech on derivatives on the Sebi-Nism symposium, he stated, “Structurally, we’re contemplating—topic to inputs from all stakeholders—whether or not the general belief within the ecosystem may be higher served by inserting some limits on the extent of particular person inventory focus in indices on which derivatives are supplied.”

What are the prevailing guidelines?

As per current apply, the highest constituent ought to be lower than 35 per cent and the highest 3 constituents ought to have a weightage of lower than 65 per cent.

As per current guidelines, benchmark and sectoral indices are permitted for derivatives if 80 per cent of the constituents are eligible for (futures & choices) F&O buying and selling.

It additionally says that no ineligible inventory ought to have a weightage of greater than 5 per cent.

The case of Nifty Financial institution, the favored index by-product, as of December 31, 2024.

Prime constituent HDFC Financial institution holds 28.11 per cent weightage, ICICI Financial institution holds 24.98 per cent weight, Kotak Mahindra Financial institution has 8.80 per cent weightage, Axis Financial institution has 8.54 per cent weightage, and SBI has round 8.45 per cent weightage.

The highest 3 banks represent round 62 per cent of the weightage.

Why is Sebi contemplating reviewing the foundations?

In current occasions, on a number of events, merchants on social media raised the priority of manipulation by massive gamers in a number of indices, particularly on expiry days.

On the SEBI NISM Samvad occasion, Sebi, WTM, Ananth Narayan G, stated, “It isn’t uncommon for a market participant to commerce in each money and by-product markets concurrently. However as a matter in fact, each trade and regulator guards in opposition to unfair buying and selling practices. As an illustration, a burst of outsized market transferring exercise by a big participant within the money market to engineer strikes and therefore guarantee massive earnings within the by-product market could possibly be a case of unfair buying and selling apply and manipulation.”

He assured that exchanges and clearing companies have glorious surveillance ecosystems.

Proposal and penalties

The ETF investments could get impacted as a result of modifications in indices constituents, so it needs to be deliberated at size earlier than any last view is taken.

It additionally must be deliberated whether or not rebalancing might be a good suggestion or whether or not a brand new sectoral index, particularly for derivatives, may be created primarily based on the proposed standards, which might be higher.

What’s going to occur to the continuity of contracts additionally must be sorted earlier than any last view is made.

Sebi has assured that as per its policy-making course of, the difficulty might be extensively consulted, and solely then will it’s tweaked.