Synopsis: SEBI’s new regulations will help the Nifty Bank index to become more balanced by lessening the weight of big banks and increasing the number of banks in the index. This may result in a Rs 2,500 crore inflow of funds in the area of mid-sized banks such as Yes Bank, Indian Bank, Union Bank, and Bank of India.
In this article, we will discuss how it may impact the index and which stocks might be seeing the heat because of this massive proposal change by the market watchdog, the Securities & Exchange Board of India (SEBI).
About the Proposal
Market watchdog SEBI has drafted a proposal that would significantly alter the way stock indices such as Nifty Bank are constructed, thereby limiting the over-utilisation of a few big banks.
The new circular includes that the maximum single-stock weight in any index will be limited to 20 percent (from 33 percent) and the total weight of the top three stocks will not be more than 45 percent (from 62 percent). These new regulations will be phased in over four stages until March 31, 2026, with the first stage scheduled for December 2025.
Moreover, SEBI has mentioned that all non-benchmark indices, such as Nifty Bank, are required to have at least 14 stocks, as against the present 12. Presently, HDFC Bank (28.49 percent), ICICI Bank (24.38 percent), and SBI (9.17 percent) are the major players, while Kotak Mahindra Bank (8.97 percent) and Axis Bank (8.78 percent) are following with their index weightages.
The rebalancing here is intended to enhance diversification and ensure that the performance of a few large banks does not account for most of the index’s movement.
How the Market Could Be Impacted
The revised qualifying criteria may result in the addition of four more banks to the Nifty Bank index: Yes Bank, Indian Bank, Union Bank of India, and Bank of India. Nuvama Alternative & Quantitative Research estimates that these additions could lead to a significant money inflow, as global and domestic funds tracking the index will be adjusting their portfolios accordingly.
Nuvama estimates that Yes Bank might get inflows up to Rs. 955 crore, Indian Bank around Rs. 660 crore, Union Bank about Rs. 600 crore, and Bank of India nearly Rs. 368 crore. These inflows would turn on the trading volume, make the liquidity better, and, thus, short-term price appreciation in these stocks is also very likely to be seen.
On the other hand, the big players such as HDFC Bank and ICICI Bank might see their contribution to the Nifty Bank overall performance being somewhat diminished as their weight in the index is reduced. Nevertheless, the change is regarded as a step forward in the structural reform, which facilitates more widespread involvement and lessens the risk of concentration; thus, it is a move toward a more balanced and resilient banking index.
Written by Satyajeet Mukherjee
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