One of the Most Popular indices in India – Bank Nifty may need a second thought about how it is going to be restructured, as only the top two companies have a combined weightage of 52.68 percent, which can lead to market index manipulation by people with deep pockets.
What is the Problem
The Index has very high weights attributable to the top three stocks, which amount to over 62.29 percent of the total index weight, creating a loophole for market manipulators to manipulate the index by just three stocks. HDFC bank has a weightage of 27.63 percent, ICICI bank has a weightage of 25.05 percent, and Kotak Mahindra bank has 9.61 percent in the Index.
SEBI also believes that this concentration increases the risks of market manipulation or excessive market volatility among market participants, the regulator has proposed measures in a consultation paper and is seeking public comments by 17 March.
Also read: Why did this Adani Group stock crash more than 50% in the last six months?
What SEBI has proposed
Other than Benchmarks, that is Nifty and Sensex, any sectoral or thematic index on which derivatives will be introduced should comprise a minimum of 14 Stocks, and the top constituent must have a weight of not more than 20 percent, and the combined weight of the top three stocks in the index should not exceed 45 percent and the weights assigned to each individual stock should be in descending order.
What could change for the Bank Nifty Index
Two more banking stocks could be added, so from the current constituents of 12 stocks, there could be 14 stocks in the Index. And the weight of the top 2 stocks HDFC and ICICI bank could see a significant reduction, which will lead to rebalancing of several mutual funds and ETFs’ portfolios.
Rajesh Palviya, senior vice-president and head of derivatives and technical research of Axis Securities, says that this is a good move to curb excessive speculation and also stated that market manipulations because of high concentration will not be possible.
Written By Abhishek Das
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