The Securities and Exchange Board of India (Sebi) on Monday invited public feedback on a proposal to stagger the implementation of concentration norms for non-benchmark indices such as the BSE’s Bankex and NSE’s Nifty Bank and Nifty Financial Services.

In May, Sebi had issued rules capping the weight of the top constituent in such indices at 20 per cent and the combined weight of the top three at 45 per cent. The framework aims to ensure that indices underlying derivatives contracts are broad-based and not overly concentrated in a few stocks.

However, exchanges and fund managers have raised concerns that immediate implementation could lead to a sharp churn in large constituents, triggering volatility and higher tracking errors for ETFs (exchange-traded funds) and index funds.

To address this, Sebi has proposed a “glide path” for rebalancing, under which weight adjustments would be carried out in multiple tranches over several months, rather than at one go.

For instance, in the Nifty Bank index — tracked by passive funds with assets of ~34,251 crore — HDFC Bank currently accounts for nearly 28 per cent, well above the prescribed 20 per cent cap. Bringing this weight down in stages (for example 2 percentage points at a time) would allow for an orderly adjustment without large selloffs.