SEBI’s Index Norm Relaxation May Prevent $1 Billion Sell-Off in HDFC Bank, ICICI Bank

The capital market regulator, the Securities and Exchange Board of India (SEBI), has proposed a relaxation in its recently announced index composition rules, which could help prevent forced outflows of nearly $1 billion from HDFC Bank and ICICI Bank, the two most heavily weighted stocks in the Nifty Bank index.

As of now, HDFC Bank holds a 29.1% weight and ICICI Bank 26.5% in the Nifty Bank index. Along with State Bank of India (SBI), which holds 8.7%, these three banks together account for over 64% of the index. This concentration significantly exceeds SEBI’s newly proposed caps.

SEBI’s New Norms for Non-Benchmark Indices

In May, SEBI introduced new rules for indices other than the benchmark Sensex and Nifty 50. These include:

• A 20% cap on individual stock weight
• A 45% cap on the combined weight of the top three constituents
• A minimum requirement of 14 stocks per index

The Nifty Bank index, which currently has only 12 constituents, does not meet these requirements and would need reconstitution.

Estimated Outflows from Key Stocks

Meeting the new criteria would require sharp reductions in the weights of HDFC Bank and ICICI Bank. Sriram Velayudhan, Senior Vice President at IIFL Capital, estimates:

• HDFC Bank: Potential outflows of $553 million (₹4,815 crore)
• ICICI Bank: Potential outflows of $416 million (₹3,620 crore)

The reallocated capital is expected to flow into other banks, such as:

• Kotak Mahindra Bank: $297 million
• Axis Bank: $237 million
• SBI: $201 million

The implications of the rule change are not limited to the Nifty Bank index. Other financial indices like the BSE Bankex and Nifty Financial Services would also need to undergo rebalancing to stay compliant with SEBI’s updated norms.

Also Read: SEBI Extends Deadline for Pledge-Repledge Margin Framework to October 10, 2025

Proposed Glide Path for Gradual Transition

To avoid sudden market disruptions, SEBI has proposed a “glide path” approach, allowing index rebalancing to take place over several months rather than in a single tranche. This phased transition aims to give fund managers and the market adequate time to adjust. SEBI is currently seeking feedback from stakeholders on the proposed plan before finalising the implementation timeline.

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