Türkiye's stock exchange will replace more than a quarter of the constituents of its benchmark BIST 100 index, it said Tuesday, a move announced as regulators seek to ensure market stability following a liquidity crunch caused by a sell-off in investment funds.

The Borsa Istanbul did not provide a reason for removing index constituents, which will be effective from next month in the biggest reshuffle since the stock exchange announced new market structure rules six years ago.

Authorities intervened last week to shore up market stability after the liquidity crunch at investment funds triggered a sharp sell-off in the benchmark stock index, including demanding the liquidation of some investment funds.

They have also detained people as part of an investigation launched after some funds defaulted on redemption requests.

The benchmark index was down 0.23% at 10:11 a.m. GMT Tuesday, stabilizing so far this week after dropping about 8% last week.

Regulators also this month updated how they calculate free-float rates, which left out some fund holdings.

Financial services company Destek Finans Faktoring and savings financing firm Katılımevim, which have been among the companies at the center of suspicious share dealings, will leave the BIST 100, the statement from the exchange said.

Conglomerate Anadolu Grubu Holding and fast-food retailer TAB Gıda will return after being removed in the previous ⁠period, it added.

Esenboğa Elektrik, Işıklar Enerji Yapı Holding and Odine Teknoloji, which joined the BIST 100 in the previous quarterly reshuffle, will also be removed.

Destek Finans will also exit from the BIST 30, while TR Anadolu Metal will join.

BIST 30 companies are exempt from the new concentration limits, and a stock's removal will require funds to reduce their holdings.

Healthier pricing

Onurcan Bal, an investment adviser at brokerage Gedik Yatırım, said the latest changes announced by Borsa Istanbul also include adjustments to shares of companies being removed, such as Işıklar Energy, Izdemir Energy, Kiler Holding and Odine Teknoloji, which had recently come under pressure and recorded floor-price trading.

"For the period ahead, when investors look at the indices and the market, they will be able to see healthier pricing, with the indices serving more clearly as the main benchmarks," Bal told Reuters.

Cemal Demirtaş, deputy general manager responsible for research at Ata Yatırım, said the index changes would help lead to healthy functioning of the market and restoring investor confidence.

He said he expected further steps soon to support the healthy functioning of the fund market and Borsa Istanbul.

Fund investigation

The Capital Markets Board (SPK) last week mandated Işbank and Ziraat Bank to oversee the liquidation of 131 ⁠investment funds managed by seven portfolio management companies, including Tera Portföy, Pusula Portföy and Hedef Portföy, on the TEFAS electronic fund trading platform.

These funds hold large positions in stocks such as Destek Finans that are being removed from the indexes.

Market segment criteria changed

Borsa Istanbul has also added new criteria for companies seeking inclusion in the BIST 30 and BIST 100 indices.

Shares included in the BIST 30 and BIST 100 must be traded on the Star Market. Under a directive amended Monday, companies traded on the Star Market will now also be assessed based on the volatility of their share prices and the size of their equity.

Companies seeking to ⁠be listed on the Star Market will be assessed on whether they fall within the highest volatility bracket, with the threshold set at a maximum of 10%.

In addition, companies listed on the Star Market will be required to have equity above the median equity value of all companies subject to the assessment.

Bal at Gedik Yatırım said the changes mean that stocks characterized by excessive volatility and sharp price movements may fail ⁠to meet the Star Market criteria, while also limiting their ability to be included in major benchmark indices.

"From this perspective, we believe the regulation is not merely a change to the market-segment classification. It could also indirectly contribute to the structure of key benchmark indices such as the BIST 30, BIST 50 and BIST 100, which are important in terms of representing the broader market," Bal said.

Bal ⁠said the Star Market was the most important segment of Borsa Istanbul's equity market in terms of trading volume and the market size of listed companies.

"Therefore, taking excessive volatility in price movements into account when determining which companies qualify for the segment can be viewed as a positive development, as it could support more balanced price formation and make the Star Market a healthier benchmark for investors," he said.