In a significant reshuffle mandated by market regulators, Yes Bank and Union Bank of India are poised for inclusion in the National Stock Exchange's (NSE) flagship banking index, the Nifty Bank. This move will expand the index from 12 to 14 constituent stocks, with the changes taking effect from December 31.
The Regulatory Push Behind the Index Expansion
This restructuring is a direct result of a directive from the Securities and Exchange Board of India (SEBI). The regulator has mandated that non-benchmark indices, including NSE's Bank Nifty and BSE's Bankex, must contain a minimum of 14 stocks to remain eligible for derivatives trading. Beyond mere expansion, SEBI is also implementing crucial safeguards to ensure market stability.
The new rules propose capping the weight of individual stocks and limiting the combined influence of the top three index components. This is designed to prevent any single stock or a small group from exerting excessive sway over the index's movement, a measure likely prompted by recent market incidents.
Major Weight Rebalancing and Financial Impact
The most dramatic consequence of the new composition methodology is a forced rebalancing of weights among the index's heavyweights. The NSE has instituted a 43% cap on the combined weight of the top three Bank Nifty constituents—HDFC Bank, ICICI Bank, and State Bank of India (SBI). This is a sharp reduction from their current combined weight of approximately 60%.
This adjustment will be executed in four phased steps from December through March 2025. According to analysis by Nuvama Alternative & Quantitative Research, this rebalancing will trigger massive portfolio adjustments by passive funds like index funds and ETFs that track the Bank Nifty.
The firm estimates that HDFC Bank and ICICI Bank could together see outflows worth $670 million by March due to their reduced weights. Conversely, SBI is projected to attract inflows of about $31 million. The two new entrants, Yes Bank and Union Bank of India, are expected to be the biggest beneficiaries, with combined passive inflows estimated at $249 million.
Projected Weight Changes for Key Banks
The shift in index influence will be substantial for the leading banks:
- HDFC Bank: Weight expected to drop from 27.5% to 18.9%.
- ICICI Bank: Weight anticipated to fall from 23.1% to 14%.
- State Bank of India (SBI): Weight set to rise from 9.4% to 10%, its highest-ever level in the index.
Market Reaction and Broader Context
On the trading day following the announcement, shares of both incoming banks experienced a dip. Yes Bank's share price fell over 1.45% to ₹22.38, extending a recent weak trend. Union Bank of India shares declined 2.02% to ₹152.62, despite showing modest gains over a one-month period.
Analysts view SEBI's move to dilute concentration risk as a proactive step towards healthier market mechanics. It follows concerns raised after incidents like the one involving US trading firm Jane Street, which was accused of attempting to influence Bank Nifty derivatives and component stocks to sway the index.
The inclusion of Yes Bank and Union Bank of India marks a new chapter for the Nifty Bank index, making it more diversified and resilient. While triggering significant short-term capital flows, the changes ultimately aim to create a more balanced and representative benchmark for India's vital banking sector.
