DUBAI: The question has gained traction after the regulator’s latest move to curb the influence of a few large banks in the Bank Nifty index.
The Securities and Exchange Board of India (SEBI) last week directed that sectoral indices used for derivatives must be broad-based, with a minimum of 14 constituents, and that no single stock should hold more than 20 per cent weight.
The combined weight of the top three cannot exceed 45 per cent, against over 60 per cent at present.
The decision is aimed at making the Bank Nifty – one of the most traded derivatives indices in India – more diversified and less dependent on a handful of heavyweights. At present, HDFC Bank, ICICI Bank and State Bank of India (SBI) together drive nearly two-thirds of the index movement, with HDFC Bank alone accounting for about 28 per cent.
Such concentration has long been viewed as a distortion that limits the representativeness of the index.
The new framework will be implemented in four tranches beginning December 2025 and completed by March 2026. Index fund managers and traders will gradually adjust their portfolios to match the revised weights, which will result in outflows from large private banks and inflows into mid-sized and public sector banks (PSBs) such as Union Bank, Bank of India (BoI) and Indian Bank.
The rebalancing is expected to make the index more reflective of the sector’s overall health.
Market experts say SEBI’s circular may well serve as a template for other sectoral indices that are similarly concentrated. Reliance Industries Ltd (RIL), for instance, makes up around 10.5 per cent of the Nifty 50 and as much as 45 per cent of the Nifty Energy index, while TCS and Infosys together account for nearly 60 per cent of Nifty IT.
Next move
If SEBI applies the same diversification principle to other indices, these benchmarks could also face recalibration in the coming years.
The move fits within SEBI’s recent effort to make the F&O segment more realistic and less prone to distortion. Over the past year, the regulator has tightened eligibility norms for stocks entering the derivatives segment, raised the threshold for market capitalisation and liquidity, and introduced stricter reporting and margin rules to curb excessive speculation.
By insisting that derivatives be based on well-diversified indices, SEBI aims to ensure that price discovery in the derivatives market genuinely reflects the underlying securities rather than the movement of a few dominant ones.
Talking to businessbenchmark.news in Dubai, a senior investment advisor said, “SEBI’s latest step reflects its effort to make India’s derivatives market more credible and globally aligned. By reducing the dominance of a few large stocks, sectoral indices will better mirror the overall performance of the sector, which is a positive signal for both domestic and international investors.”
Globally, major index providers such as MSCI and S&P follow similar diversification rules to prevent outsized influence of individual companies. India’s shift in the same direction signals a maturing market architecture where indices are designed not just for trading ease but for credibility.
Beginning with Bank Nifty, SEBI may well be laying the foundation for a more balanced and representative index landscape that mirrors the true breadth of India’s corporate sector.
