Average Daily Trading Volume

An index is only as trustworthy as the prices it is built from. If a constituent barely trades, its last price is a rumour, and an index futures contract settled on that rumour is a contract nobody can hedge with confidence.

So SEBI puts a liquidity floor under index construction. Most of the index, by weight, has to be made of commodity futures that genuinely trade in size every day — and "in size" is defined in rupees, with a different number for agricultural and non-agricultural commodities because their markets are simply different sizes.

Anything below the bar is not banned outright. It is just capped, so that an illiquid constituent can never move the index much.

For composite indices on which derivatives are to be traded, SEBI's index construction guidelines of 18 June 2019 require that a minimum of 80% of index weight comprise commodity futures whose Minimum Average Daily Trading Volume is at least:

• Rs 75 crore for agricultural commodities
• Rs 500 crore for non-agricultural commodities

And if a commodity does not meet that test, its individual weight shall not exceed 15% of the index.

Two companion eligibility rules sit alongside it. Each constituent future must have existed for at least the last 12 months and must have traded on 90% of the trading days during those 12 months. And weights are set by the exchanges on a scoring of physical market production value and liquidity value, in a ratio where neither may fall below 25% — so liquidity is scored twice over, once as an eligibility gate and again as a weighting input. Liquidity Value is the average trading volume of the commodity's futures over the last 12 months.

Do not confuse this threshold with the one for launching options. Under Chapter 6, an exchange may list options on a commodity future only if the average daily turnover of the underlying futures over the previous twelve months is at least Rs 100 crore for agricultural and agri-processed commodities, or Rs 1,000 crore for others. Same idea, different numbers, different purpose.

For a tradeable composite index:
    Sum of weights of constituents meeting the ADTV floor  >=  80%
    Weight of any constituent failing the ADTV floor       <=  15%

ADTV floor:  Rs 75 crore (agri)   |   Rs 500 crore (non-agri)

A proposed non-agricultural composite index, with each constituent's ADTV over the last twelve months:

The two tests:

Liquid weight = 24 + 22 + 18 + 16 + 12 = 92%   >= 80%   PASS
Lead's weight = 8%                             <= 15%   PASS

The index is constructible. Now raise Lead to 18% by trimming Crude Oil to 14%. Liquid weight falls to 82%, still above 80 — but Lead now breaches the 15% individual cap and the construction fails on the second test alone.

That is the design point. The 80% rule alone would let a single illiquid constituent take a fifth of the index; the 15% cap stops it.

Chapter 2 (Commodity Indices), section 2.3, point 3, with the options eligibility figures in Chapter 6 section 6.3. Expect the thresholds asked directly — Rs 75 crore agri and Rs 500 crore non-agri for 80% of index weight — and the 12-month/90%-of-trading-days existence test alongside them.

• Rs 75 crore agri, Rs 500 crore non-agri — for index construction. The Rs 100 crore / Rs 1,000 crore pair is for launching options on a commodity future. Four numbers, two different rules.
• 80% of index weight, not 80% of constituents. A count of commodities is not the test.
• The 15% cap applies only to constituents that fail the ADTV floor. Liquid constituents are capped separately, at 30% in a composite index, with no cap in a sectoral index.
• Both the 12-month existence and the 90%-of-days trading tests must be met, in addition to ADTV.
• ADTV is a rupee volume, not a lot count. A cheap commodity trading in huge quantity can still fail.
• Liquidity enters index construction twice — as this eligibility gate, and as the liquidity value score used to fix weights against production value in a ratio of at least 25:75 either way.