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Market regulator Sebi move to clip HDFC, ICICI wings in Bank Nifty
The latest measures introduced by the Securities and Exchange Board of India (Sebi) for the futures & options (F&O) segment may adversely impact HDFC Bank and ICICI Bank stocks.
Market participants anticipate a churn of nearly $1 billion as passive funds tracking the Bank Nifty and Bankex indices adjust to the new regulations. They expect significant selling pressure, particularly on HDFC Bank and ICICI Bank.
Currently, both banking giants carry a weighting of over 25 per cent each in the 12-member Nifty Bank index, a widely followed benchmark in the derivatives segment. In a move aimed at reducing index concentration and volatility, the markets regulator has now capped the weighting of a single stock in non-benchmark indices at 20 per cent. It has also mandated that such indices must include at least 14 constituents, with the combined weighting of the top three components limited to 45 per cent.
Experts said Sebi's move came amid fears that thematic indices run the risk of manipulation due to high concentration of individual stocks. These changes, announced by the markets regulator on Thursday, will be implemented by November 3.
Brian Freitas of Periscope Analytics, who publishes research on the Smartkarma platform, expects significant outflows from HDFC Bank and ICICI Bank as a result of the changes. He estimates that HDFC Bank could face selling to the tune of ₹2,140 crore, while ICICI Bank may see ₹1,673 crore in sales, in line with the newly imposed 20 per cent cap on weightings.
Conversely, Freitas anticipates the inclusion of Yes Bank and Union Bank of India in the Bank Nifty index, taking the total number of constituents to 14. Their additions are expected to trigger inflows of ₹888 crore and ₹600 crore for the respective stocks.
Other Bank Nifty components may see inflows ranging from ₹60 crore to ₹400 crore due to redistribution of capital following the reduced weighting of HDFC Bank and ICICI Bank.
While the recommendations must be implemented by November 3, it is likely that the index provider will make these changes during the next rebalance in September, according to Freitas.
There is a small possibility that the capping changes could be implemented in the June quarter, with the two index inclusions occurring in the September quarter. Alternatively, the capping changes could be rolled out in two phases: The first at the end of June and the second (including the two inclusions) in September, he said. A phased rollout could help in smooth implementation.
The churn resulting from the reconstitution of the Bankex will be in addition to this. However, this index is not as widely tracked by passive funds as the Bank Nifty index.
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