Context:
On 29 May 2025, the Securities and Exchange Board of India (Sebi) released a consultation paper proposing stricter norms for sectoral and thematic indices used in derivatives trading. The move aims to ensure that indices are broad-based and not dominated by a few stocks, thereby reducing concentration risks.
Key Highlights:
- Minimum Constituents:
- Each sectoral/thematic index must have at least 14 stocks.
- Stock Weightage Cap:
- No single stock can have more than 20% weight in the index.
- Combined weight of the top 3 stocks capped at 45%.
- Remaining stocks must follow a descending order of weightage.
What are Derivatives?
A derivative is a financial instrument whose value is derived from the value of an underlying asset such as stocks, bonds, currencies, commodities, or indices.
Types of Derivatives:
- Forwards – Customized contracts between two parties to buy/sell an asset at a future date at a pre-agreed price (not traded on exchange, OTC).
- Futures – Standardized contracts to buy/sell an asset at a set price on a future date (traded on exchanges like NSE, BSE, MCX).
- Options – Contracts that give the buyer the right, but not the obligation, to buy/sell an asset at a specified price within a set time.
- Call Option = Right to Buy
- Put Option = Right to Sell
- Swaps – Agreement to exchange cash flows or liabilities (e.g., interest rate swaps, currency swaps).
What are Sectoral and Thematic Indices?
- Sectoral Indices track companies belonging to a specific sector such as banking, IT, FMCG, pharma, metals, energy, etc.
- Thematic Indices track companies across multiple sectors but grouped around a particular theme, e.g., infrastructure, ESG, consumption, services.
Why Important for Derivatives Trading?
- These indices are used for Futures & Options (F&O) contracts, allowing investors to hedge, speculate, or take exposure in a sector/theme without investing in individual stocks.
- Provide liquidity and risk management tools for institutional and retail investors.
