Introduction
India’s derivatives market has become one of the most active globally, but much of its activity has revolved around a few heavyweight indices. To correct this imbalance, the Securities and Exchange Board of India (“SEBI“) issued a circular on October 30, 2025, introducing new eligibility norms for derivatives on non-benchmark indices such as Bank Nifty, FinNifty, and BSE Bankex.
The reform aims to make these indices broader, more balanced, and representative of the underlying sectors. It addresses the long-standing issue of concentration risk, where a few large-cap stocks disproportionately influence market behavior. SEBI’s intervention restructures index eligibility and spreads exposure more evenly across sectoral constituents.
This blog examines the circular’s key provisions, SEBI’s rationale, the phased implementation strategy, and the implications for exchanges, intermediaries, and investors in India’s derivatives ecosystem.
Why SEBI Introduced the Reform
Indices such as Bank Nifty and Bankex have long served as benchmarks for the banking sector in India’s futures and options (F&O) market. Over time, these indices became heavily concentrated. In Bank Nifty, HDFC Bank, ICICI Bank, and State Bank of India together account for over 60 percent of the index weight. This concentration means that any significant movement in one of these stocks can distort the entire index and its derivatives.
SEBI observed that such an imbalance allows traders to create large, indirect exposures to individual stocks through index derivatives, bypassing limits that would otherwise apply to single-stock positions. This raises systemic risks and reduces the representativeness of sectoral indices.
To correct this, SEBI’s circular introduces structural diversification requirements that reduce reliance on a few dominant entities and distribute risk more broadly across the market.
Key Provisions of the Circular
The new framework establishes three central criteria for non-benchmark indices used in derivative trading:
Each index must include at least fourteen constituent stocks.
The weight of any single stock cannot exceed twenty percent, and the combined weight of the top three stocks cannot exceed forty-five percent.
All stocks must be arranged in descending order of weights to ensure proportional representation.
These measures collectively promote diversification, reduce concentration risk, and create indices that better reflect sector-wide performance.
SEBI’s Objectives
SEBI’s reform serves three interlinked objectives:
1. It reduces concentration risk by ensuring no single stock can disproportionately influence an index or derivative. This limits systemic vulnerability and enhances resilience.
2. It improves representativeness by including more mid-sized entities, allowing indices to mirror the actual structure of the sector.
3. It enhances transparency and market discipline. A more balanced index ensures that derivative pricing, trading activity, and volatility better reflect genuine sectoral performance.
SEBI’s approach balances prudential regulation with operational feasibility, strengthening the F&O market without stifling its growth.
Impact on Key Stakeholders
Stock Exchanges and Clearing Corporations
Exchanges such as NSE and BSE must revise their index methodologies, amend by-laws, and publish detailed rebalancing schedules. Clearing corporations must adjust risk management systems and ensure smooth settlement of contracts during the transition.
1. Brokers and Trading Members: Brokers must update trading systems, revise margin frameworks, and communicate upcoming changes to clients. While the operational load may rise temporarily, the reform will create more stable, predictable index behavior, improving long-term trading conditions.
2. Institutional Investors: Mutual funds and exchange-traded funds (ETFs) tracking Bank Nifty, FinNifty, or Bankex must realign portfolios with the revised index weights. SEBI’s phased rollout helps them minimize tracking error and transaction costs while ensuring compliance with the new structure.
3. Retail Investors: Retail traders will not face disruptions in existing derivative contracts. However, they will benefit from reduced volatility and indices that reflect broader sector performance. The inclusion of more diverse stocks creates new trading opportunities and a fairer risk profile for retail participants.
Evolution: Old Regime to the New
Previously, SEBI’s norms for index derivatives were permissive. Sectoral indices could qualify with as few as two constituents, and there were no caps on stock weight. This allowed highly concentrated indices to dominate the derivatives landscape. The new rules mark a decisive shift from this leniency. By introducing minimum constituent requirements and weight caps, SEBI has brought non-benchmark indices in line with the diversification standards already applied to benchmark indices like Nifty 50 and Sensex. This transition represents a move from a volume-driven framework that prioritized liquidity to a quality-driven model focused on stability, representation, and systemic strength.
Market Stability and Growth
The reform underscores SEBI’s long-term policy consistency—encouraging innovation while protecting market integrity. By adjusting existing indices rather than replacing them, SEBI ensures continuity and avoids liquidity shocks.
Redistributing index weight across more constituents spreads trading activity and price discovery more evenly, creating a healthier, more inclusive market. Analysts have described this reform as a “risk distribution exercise” rather than a restriction, one that strengthens participation across all tiers of listed entities.
In the broader picture, SEBI’s approach reflects maturity. It recognizes that sustainable growth requires structure, not speed, and that a deeper market must rest on diversified foundations.
Legal and Compliance Framework
SEBI issued the circular under Sections 11(1) and 11(2)(a) of the SEBI Act, 1992, which empower the regulator to ensure the orderly development of the securities market and safeguard investor interests. Exchanges and clearing corporations must update their rulebooks, communicate schedules to participants, and ensure full compliance.
Mutual funds and institutional investors are expected to complete rebalancing according to the phase timelines. While SEBI may review implementation progress, its extended deadlines show a practical and consultative stance. The focus remains on compliance through collaboration, not coercion.
AMLEGALS Remarks
SEBI’s decision to diversify non-benchmark indices is both timely and strategic. The move corrects an imbalance that had long made India’s derivatives market efficient but overly concentrated. By mandating diversification and implementing it in stages, SEBI has successfully balanced regulatory prudence with market flexibility.
The reform strengthens structural integrity, improves representativeness, and aligns India’s derivatives market with global best practices. It marks a shift from dominance to diversity—where indices no longer rely on a few giants but reflect the strength of an entire sector.
This is not merely a technical recalibration but a structural evolution that will define the next phase of India’s capital market growth.
For any queries or feedback, feel free to connect with hiteashi.desai@amlegals.com