India's two prominent stock exchanges will have to soon rejig the non-benchmark indices to keep them in the derivatives segment.
The newly floated consultation paper by market regulator Securities and Exchange Board of India seeks to prevent non-benchmark indices in derivatives market if they do not have at least 14 stocks as constituents.
The proposal, currently in consultation stage, requires non-benchmark indices to fulfill the additional criteria to be eligible for introducing derivatives:
The index should have minimum 14 constituents.
The top constituent's weight in the index should be less than or equal to 20%.
The combined weight of the top three constituents should be less than or equal to 45%.
All other constituents' individual weights must be lower than those of the higher weighted constituents to form a descending weightage structure.
Currently, National Stock Exchange offers derivatives for the benchmark Nifty 50, Nifty Bank, Nifty Financial Services and Nifty Midcap Select. Meanwhile, BSE has derivatives available for Sensex, Sensex 50 and Bankex.
Nifty Bank has twelve constituents, which means NSE will have to add two more stocks if the new F&O norms are enacted. The exchange calculates weightage of each stock in the index based on its free-float market capitalisation such that no single stock has more than 33% and weightage of top three stocks cumulatively does not exceed more than 62% at the time of rebalancing.
The remaining NSE derivative indices largely meet the proposed F&O guidelines.
Meanwhile, BSE Bankex has ten constituents and the exchange will have to add four more stocks to the index to ensure eligibility to the derivative segment. Bankex follows a non-market capitalisation weighting scheme. Under this method, index constituents are weighted based on float-adjusted market capitalisation at each quarterly share update, subject to a 22% weight cap. Any excess weight is distributed proportionally across the remaining stocks in the index.
The Sensex and Sensex 50 consist of 30 stocks and 50 stocks, respectively. While these two gauges employ the free-float market capitalisation method to determine weightage.
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