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SEBI is forcing a nifty bank shake-up: Are PNB and BoB the new 'must-owns'?

  //stocks-investing.news-articles.net/content/202 .. -shake-up-are-pnb-and-bob-the-new-must-owns.html
  Published in Stocks and Investing on Monday, November 3rd 2025 at 19:34 GMT by The Financial Express

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SEBI’s Mandated Nifty Bank Shake‑Up: PNB and BOB Join the Vanguard

The Securities and Exchange Board of India (SEBI) has taken decisive steps to modernise the composition of the Nifty Bank Index, prompting a reshuffle that could reshape portfolio strategies for institutional and retail investors alike. The regulatory body’s recent directive, published in the Financial Express on May 28, 2024, explains that PNB and BOB are now slated to become the “new must‑owns” of the index, a move that will reverberate across the market.

Why SEBI Is Overhauling the Index

SEBI’s mandate stemmed from a growing concern that the existing methodology for selecting banks in the Nifty Bank Index had become outdated. The index, a benchmark for the Indian banking sector, had historically been dominated by a handful of large, high‑liquidity banks such as HDFC Bank, ICICI Bank, and Kotak Mahindra. However, evolving market dynamics, changing liquidity profiles, and a broader shift towards a more diversified banking landscape highlighted the need for a reassessment.

The regulator introduced new criteria focusing on market capitalization, free‑float, and trading volume. A minimum of 5% free‑float market cap and a high liquidity threshold became prerequisites for inclusion. This was aimed at ensuring the index better mirrors the underlying market realities and provides a more robust benchmark for fund managers and investors.

The Path to Inclusion: PNB and BOB

India’s state‑owned banks, namely Punjab National Bank (PNB) and Bank of Baroda (BOB), have seen significant improvements in asset quality and market capitalization over the past few years. PNB, after a painful period of non‑performing assets (NPAs) in the early 2020s, has executed a series of recapitalisation and restructuring measures that have bolstered its balance sheet. The bank’s net profit trajectory has seen a steady climb, and its market cap now comfortably exceeds the 5% free‑float threshold set by SEBI.

Similarly, BOB has benefited from a strategic expansion in its retail and wholesale segments, coupled with a successful debt‑funding strategy that has improved its free‑float market cap. The bank’s liquidity profile has also been a key factor in meeting SEBI’s new inclusion criteria.

Both banks have also achieved high trading volumes in the primary market, further aligning them with the index’s new liquidity requirement. This combination of robust capital base, improving profitability, and liquidity has positioned PNB and BOB as logical additions to the Nifty Bank Index.

Implications for Investors and Market Dynamics

The addition of PNB and BOB is expected to bring a more diversified risk profile to the index. While the current index heavily favours the “big four” banks, the inclusion of PNB and BOB introduces a new dimension of public sector banking, potentially offering a hedge against private‑bank‑heavy risk concentrations. For index‑tracking funds, this shift will lead to a rebalancing of weightages, requiring a realignment of holdings to maintain tracking accuracy.

Institutional investors will also need to adjust their exposure to meet the new regulatory guidelines. The rebalancing process could trigger short‑term price volatility as large‑cap fund managers reallocate capital. Over the medium term, however, the index is expected to become a more reliable barometer of the sector’s overall health.

Broader Context and Sectoral Trends

The shift is part of a larger narrative in the Indian banking sector, where digital banking, regulatory reforms, and a push for greater capital adequacy have redefined competitive dynamics. Banks that have successfully navigated these reforms, particularly state‑owned banks that have tightened their risk frameworks, are now gaining market recognition.

SEBI’s action also signals its commitment to maintaining index integrity in a rapidly evolving market environment. By tightening inclusion criteria, the regulator aims to mitigate the risk of index dilution and ensure that the benchmark remains representative of the most liquid and well‑capitalised banks.

Looking Ahead

The index revision will take effect from the next re‑balancing date, slated for the third week of July 2024. Investors will have a brief window to adjust their positions accordingly. Analysts predict that the addition of PNB and BOB may spur increased participation from index‑based ETFs, given the higher free‑float market cap and liquidity of the two banks.

In sum, SEBI’s move to incorporate PNB and BOB into the Nifty Bank Index represents a significant shift toward a more inclusive and realistic benchmark. It underscores the importance of liquidity, free‑float, and asset quality in determining index composition, and sets the stage for a more diversified representation of India’s banking sector. As investors adapt to this new landscape, the sector’s evolution will continue to be monitored closely, with particular attention to how the public‑sector banks perform against their private counterparts in this updated index framework.