SEBI’s new index norms to ease $1 billion sell-off risk for HDFC and ICICI Bank
The move comes against the backdrop of its recent action against New York-based Jane Street for alleged manipulation
The Securities and Exchange Board of India (SEBI) has proposed relaxation of index realignment norms. The approach could ease potential selling pressure of $1 billion in HDFC Bank and ICICI Bank, the two heavyweights in the Nifty Bank index.
Currently, the two banks carry weights of 29.1 percent and 26.5 percent, respectively. With the State Bank of India (8.7 percent), the three account for over 64 percent of the index, which is above the market regulator’s prescribed limits.
Passive funds tracking Nifty Bank manage over Rs.34,000 crore in assets, which can change market dynamics.
In May, SEBI capped the weight of individual constituents in non-benchmark indices (beyond Sensex and Nifty 50) at 20 percent. The combined share of the top three constituents was limited to 45 percent.
Meanwhile, the Nifty Bank index, with 12 members, falls short of the regulator’s new requirement of at least 14 stocks. Thus, for compliance, the weights of HDFC Bank and ICICI Bank would have to be cut sharply.
Sriram Velayudhan, Senior Vice-President at IIFL Capital, suggested potential outflows of $553 million (Rs.4,815 crore) from HDFC Bank and $416 million (Rs.3,620 crore) from ICICI Bank. The redistributed weight is expected to move into peers such as Kotak Mahindra Bank ($297 million), Axis Bank ($237 million), and SBI ($201 million).
He added that the reshuffle could have an even wider impact, as other indices such as the BSE Bankex and Nifty Financial Services would also need to comply.
Meanwhile, to smoothen the transition and avoid market disruption, SEBI proposed a ‘glide path’. It allowed rebalancing in phases over several months, instead of a one-time adjustment.
While the regulator has sought market feedback on the plan, experts welcomed the move but called for deeper broad-basing.
Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research, expressed, “Ideally, the index should have 16–18 constituents. The top five liquid banks could carry weights in the 15–20 percent range, with the rest spread more evenly. Giving high weights to low-float names could distort the representation.”
SEBI’s proposal is part of its broader derivatives market overhaul to reduce concentration risks and strengthen index integrity.
The move comes in the wake of its recent action against New York-based Jane Street for alleged manipulation of the Nifty Bank index.