BSE Index Rule Changes: What Traders Should Know About the New Entry Barriers

It’s not just earnings and economic data that move markets—sometimes, the rules of the game itself change. On 1 August 2025, the Bombay Stock Exchange (BSE) announced major tweaks to the selection criteria for two of its widely tracked indices: the BSE 500 and the BSE 500 Shariah.

These changes might sound technical, but they carry weight. For traders, investors, and portfolio managers, index inclusion isn’t just a badge—it can influence liquidity, visibility, and even stock price action. So when the rules shift, it’s worth taking a closer look.

In this blog, we break down what’s changing, why it matters, and how it could affect index composition and trading strategies going forward.

BSE 500 Index: Shift from Absolute Thresholds to Relative Rankings

The BSE 500 Index will no longer use fixed eligibility thresholds such as an annualised traded value of at least ₹100 crore. Instead, effective 22 December 2025, companies will be required to rank within the top 750 based on:

• Annualised traded value is calculated by taking the median of monthly medians over 6 months and then annualising the result based on 250 trading days.
• Average free float market capitalisation of 6 months.
• To be eligible, stocks must have traded on at least 80% of trading days in the review period. This rule filters out companies with sporadic activity, even if they meet volume or market cap thresholds.

This change introduces a relative performance filter, which means:

• Companies with seasonal spikes or short-term liquidity bursts may no longer qualify unless they consistently rank in the top 750.
• Firms with stable but modest trading volumes may be excluded if overshadowed by more liquid peers.
• The eligible universe is also shifting from the BSE AllCap Index to the broader BSE 1000 Index, increasing competition for inclusion.

This methodology aligns the BSE with global indexing standards, where ranking-based eligibility provides a dynamic representation of market liquidity and capitalisation.

Implications of BSE Index Rule Change

For traders and fund managers, this BSE index reshuffling will be more sensitive to relative performance, not just absolute metrics. Here is how:

• Implications for Passive Funds

Passive funds tracking the BSE 500 will need to realign their portfolios as per the revised ranking methodology, bringing several important implications. One major concern is higher turnover risk, as more frequent changes in rankings, unlike the earlier fixed thresholds, can lead to increased index constituent churn and consequently higher rebalancing costs. This also contributes to tracking error volatility, where Exchange Traded Funds (ETFs) and index funds might show short-term deviations from benchmark performance due to delayed rebalancing or liquidity issues.

Another challenge is portfolio drift, where stocks falling out of the top 750, regardless of meeting older absolute benchmarks, may now need to be sold, even if they still appear fundamentally sound. As a result, fund managers must keep a closer eye on relative liquidity and market capitalisation trends. For instance, a mid-cap stock with a traded value of ₹90 crore may have earlier qualified under the old rules but could now be excluded if it fails to rank within the top 750.

• Trading Volume Dynamics

The shift to a ranking-based eligibility system is expected to reshape trading volume patterns across the BSE universe significantly. Stocks hovering near the top 750 cutoff may witness a surge in speculative trading, as investors try to boost their rankings to qualify for index inclusion.

Stocks that consistently rank in the top 500 could begin to enjoy a liquidity premium, attracting higher valuations driven by steady demand from index funds and reduced exit risk. Conversely, companies falling outside the top 750 may suffer from shrinking volumes as they lose visibility and institutional interest.

This evolving structure also encourages companies to enhance their public float and trading activity, potentially resulting in promoter stake dilution or corporate actions aimed at improving liquidity.

BSE 500 Shariah Index: Tighter Compliance and Fund Flow Impacts

Effective 22 September 2025, the BSE 500 Shariah Index will tighten its non-permissible revenue threshold from 4% to 3% of total revenue. The debt-to-total-assets threshold remains unchanged at not more than 25%.

This change has several implications:

• Stock exclusions: Companies with significant interest income or non-compliant revenue streams may be dropped, even if they meet other financial criteria.
• Shariah fund rebalancing: Islamic funds tracking the index will need to divest from newly non-compliant stocks, potentially triggering short-term price corrections.
• Corporate restructuring: Firms aiming for Shariah inclusion may reduce interest-bearing instruments or restructure revenue streams to meet the 3% threshold.

For example, a company earning ₹10 crore in interest income on ₹250 crore total revenue (4%) would now be excluded unless it reduces non-permissible income to ₹7.5 crore or less. This could lead to financial engineering or alternative financing models like sukuk issuance.

Shariah-compliant investing is gaining traction among domestic and global investors. The tighter threshold improves credibility but also narrows the investable universe, making compliance monitoring critical for fund managers.

Conclusion

The changes announced on 1 August 2025, to the BSE 500 and BSE 500 Shariah indices, reflect a continued effort by the BSE to keep its index offerings fair and reflective of actual market trends. While these changes may cause some short-term shifts in trading behaviour and index composition, they are likely to improve overall index efficiency in the long run.

Traders, fund managers, and passive investors would be well advised to track how these changes influence index additions and deletions during the next rebalancing cycle.