Indian Regulator Plans to Extend Equity Derivatives' Tenure to Curb Losses, Shares of Stock Exchanges and Discount Broker Fall 5%

India's markets regulator plans to extend the tenure and maturity of equity derivatives contracts to curb trading losses. The regulator aims to curb trading in a segment where over 90% of traders suffer losses. The plans are at a conceptual stage, and shares of stock exchange operators BSE and Angel One have slid 5% each. SEBI has also set up a dedicated unit to examine patterns of manipulation and plans to build a regulated platform for the grey market.

The Securities and Exchange Board of India (SEBI) has proposed a relaxation of index realignment norms, which could significantly ease the potential selling pressure on HDFC Bank and ICICI Bank. These two banks, heavily weighted in the Nifty Bank index, currently face the risk of a substantial sell-off due to their high weightages [1].

HDFC Bank and ICICI Bank command weightages of 29.1% and 26.5%, respectively, which, along with State Bank of India (SBI) at 8.7%, account for over 64% of the Nifty Bank index. This concentration exceeds SEBI's prescribed limits. Passive funds managing assets worth over Rs 34,000 crore are at risk if a forced rebalancing occurs [1].

SEBI's proposed changes aim to reduce concentration risks and enhance index integrity. To comply with the new norms, the weightages of HDFC Bank and ICICI Bank would need to be significantly reduced. Estimates suggest potential outflows of $553 million (Rs 4,815 crore) from HDFC Bank and $416 million (Rs 3,620 crore) from ICICI Bank. The redistributed weight is expected to flow into peers like Kotak Mahindra Bank, Axis Bank, and SBI [1].

The reshuffle could also impact other indices such as the BSE Bankex and Nifty Financial Services, which would need to comply with the new guidelines. SEBI has proposed a "glide path" to smooth the transition and avoid market dislocation, allowing rebalancing in phases over several months [1].

Market experts have broadly welcomed the move, though some have called for further broad-basing. Abhilash Pagaria, Head of Nuvama Alternative & Quantitative Research, noted that ideally, the index should have 16–18 constituents, with the top five liquid banks carrying weightages in the 15–20% range [1].

In a separate development, SEBI has issued observation letters to five companies, effectively clearing their IPO proposals. Innovatiview India, Park Medi World, Runwal Enterprises, Jinkushal Industries, and Advance Agrolife have received approval to launch their maiden public issues [2].

The proposed changes by SEBI are part of a broader derivatives market overhaul aimed at reducing concentration risks and enhancing index integrity. The regulator has set up a dedicated unit to examine patterns of manipulation and plans to build a regulated platform for the grey market [1].

References:

[1] https://www.business-standard.com/markets/news/sebi-ease-1bn-sell-off-risk-hdfc-icici-bank-125081901333_1.html

[2] https://www.business-standard.com/markets/news/innovatiview-india-park-medi-world-3-others-get-sebi-nod-for-ipo-launch-125082000741_1.html