Bank Nifty, FinNifty, Bankex: Ajay Garg explains SEBI’s revised derivatives norms

Ajay Garg, CEO of SMC Global Securities on Monday said SEBI’s updated prudential framework will enforce stricter diversification norms before stock exchanges are allowed to introduce derivatives on non-benchmark indices such as Bankex, FinNifty and even Bank Nifty. The revised rules call for a minimum of 14 constituents in an index, while capping the weight of the top stock at 20 per cent and limiting the combined weight of the top three to 45 per cent.

Garg noted that current thresholds are more relaxed. In Nifty Bank, for instance, no single constituent may exceed 33 per cent and the top three together can go up to 62 per cent.

As of October 31, HDFC Bank has about 28 per cent weight, making it a disproportionately large influence on index performance. Under SEBI’s new framework, this concentration will be reduced in four monthly phases ending March 2026 to minimise market disruption and avoid sudden volatility shocks.

Bank Nifty, which currently permits a maximum of 12 stocks, will also need to expand to at least 14 constituents to meet diversification criteria. For BSE’s Bankex and NSE’s FinNifty, all required adjustments will be completed in a single phase by December 31, 2025, Garg said in a note.

According to him, these reforms will make indices less vulnerable to sharp moves driven by a single heavyweight stock and will improve risk distribution across the financial sector universe. He observes that the move enhances transparency, curbs susceptibility to market manipulation and creates a healthier foundation for derivative products as well as passive investment strategies that rely on these indices.

Garg added that the impact on brokers and asset managers will be meaningful.

Bank Nifty today is a core building block for numerous ETFs and passive funds, and fund managers will now need to carefully evaluate potential inclusions under the new eligibility requirements and the implications for risk-return dynamics, he said.

Brokers, in turn, may see heightened rebalancing activity as investors adjust portfolios in response to index revisions over the coming months, Garg added.