Sebi's index norm relaxation to ease $1 bn sell-off risk for HDFC, ICICI

Sebi's proposed relaxation of index realignment norms could reduce potential $1 billion sell-off risk for HDFC and ICICI Bank, which are heavily weighted in the Nifty Bank index

The Securities and Exchange Board of India’s (Sebi’s) proposed relaxation of index realignment norms could ease potential selling pressure of nearly $1 billion in HDFC Bank and ICICI Bank — the two heaviest weights in the Nifty Bank index.

 

Currently, HDFC Bank and ICICI Bank carry weights of 29.1 per cent and 26.5 per cent, respectively. Along with State Bank of India (8.7 per cent), the three account for over 64 per cent of the index — well above the regulator’s prescribed limits. Passive funds tracking Nifty Bank manage more than ₹34,000 crore in assets, making any forced rejig highly market-moving.

 

 

In May, Sebi capped the weight of individual constituents in non-benchmark indices (those beyond Sensex and Nifty 50) at 20 per cent and limited the combined share of the top three constituents to 45 per cent. The Nifty Bank index — with 12 members — also falls short of Sebi’s new requirement of at least 14 stocks. 

 

To comply, the weights of HDFC Bank and ICICI Bank would have to be cut sharply. Estimates by Sriram Velayudhan, senior vice-president at IIFL Capital, suggest potential outflows of $553 million (₹4,815 crore) from HDFC Bank and $416 million (₹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), among others.

 

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.

 

To smoothen the transition and avoid market disruption, Sebi has proposed a “glide path”, allowing rebalancing in phases over several months instead of a one-time adjustment. The regulator has sought market feedback on the plan.

 

Market experts have broadly welcomed the move but called for deeper broad-basing.

 

Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research, said: “Ideally, the index should have 16–18 constituents. The top five liquid banks could carry weights in the 15–20 per cent range, with the rest spread more evenly. Giving high weights to low-float names could distort the representation.”

 

The proposal is part of Sebi’s broader derivatives market overhaul, aimed at reducing concentration risks and strengthening index integrity. It comes against the backdrop of Sebi’s July action against New York-based Jane Street for alleged manipulation in the Nifty Bank index.