In a move aimed at strengthening market prudence and ensuring stability in India’s derivatives segment, the Securities and Exchange Board of India (SEBI) has issued a new circular dated October 30, 2025. The directive focuses on the implementation of eligibility criteria for derivatives on existing Non-Benchmark Indices (NBIs) and outlines how exchanges must comply with the newly introduced prudential norms.
Background and Context
Earlier this year, SEBI issued a comprehensive circular on May 29, 2025 (SEBI/HO/MRD/TPD-1/P/CIR/2025/79), which introduced updated eligibility norms for derivatives on NBIs. These indices, which are not part of the benchmark indices like NIFTY 50 or SENSEX, play a growing role in the Indian derivatives ecosystem. With the rapid expansion of financial products linked to sectoral and thematic indices, SEBI recognized the need to ensure that these indices maintain sufficient diversification and balance to safeguard investors and prevent market manipulation.
Clause 5.7 of the May circular prescribed key prudential norms for introducing derivatives on NBIs. These include:
- A minimum of 14 constituents in the index.
- The top constituent’s weight capped at 20%.
- The combined weight of the top three constituents not exceeding 45%.
- A descending weight structure, ensuring that no smaller constituent outweighs a larger one.
These rules aim to prevent over-concentration and ensure that indices used for derivatives are broad-based and reflective of the overall sector or theme they represent.
Implementation and Compliance
Following the initial directive, stock exchanges were instructed to submit proposals for NBIs with existing derivatives contracts within 30 days. However, given the potential impact on passive funds, exchange-traded funds (ETFs), and existing derivatives positions, SEBI opted for a consultative approach. A public consultation held on August 18, 2025, sought feedback on whether compliance should be achieved by creating separate indices or by adjusting constituents and weights within existing ones.
After reviewing feedback and considering recommendations from the Secondary Market Advisory Committee (SMAC), SEBI has now finalized the approach.
Key Implementation Measures
According to the October 30 circular, stock exchanges must implement compliance through constituent or weight adjustments within existing indices. This ensures continuity and minimizes disruption for market participants.
- For indices such as BANKEX (BSE) and FINNIFTY (NSE), compliance will be achieved in a single tranche, meaning the adjustments will be implemented at once.
- For BANKNIFTY (NSE), however, SEBI has prescribed a phased approach — with changes rolled out over four monthly tranches. This gradual adjustment is designed to ensure orderly rebalancing of assets under management (AUM) that track the index and to mitigate potential volatility.
Conclusion
SEBI’s latest circular marks another step toward enhancing transparency and resilience in India’s derivatives market. By enforcing stricter eligibility criteria for derivatives on non-benchmark indices, the regulator aims to ensure that such indices remain well-diversified and representative. The phased implementation strategy reflects SEBI’s balanced approach — prioritizing both market integrity and investor protection while allowing market participants sufficient time to adjust to the new norms.