निव्यभिभ्योऽड्व्यवाये वा छन्दसि

Operational rule vidhi

The ष् is optionally substituted in the छन्दस् (Vedas) after the उपसर्ग (Prepositions) नि , वि and अभि when the augment अट् intervenes.

Word by word (padaccheda)

Left context नि- वि- अभिभ्यः pañcamī · bahuvacanaRight context अड्व्यवाये saptamī · ekavacanaIndeclinable वा avyayaRight context छन्दसि saptamī · ekavacana

Left context Pañcamī (5th case): "after X", the operation applies to what follows (1.1.67 तस्मादित्युत्तरस्य). Also used for limits and sources.
Right context Saptamī (7th case): "when X follows", the operation applies to what precedes (1.1.66 तस्मिन्निति निर्दिष्टे पूर्वस्य). Also a condition or domain ("in the sense of").
Indeclinable An avyaya such as च "and", वा "optionally", न "not".

Full reading

नि-वि-अभिभ्यः अड्व्यवाये वा छन्दसि

Pāṇini leaves out words that carry over from earlier sūtras. Expand to see the rule as a reader actually understands it.

Commentary

The ष् is optionally substituted in the छन्दस् (Vedas) after the उपसर्ग (Prepositions) नि , वि and अभि when the augment अट् intervenes.
Thus न्यषीदत् or न्यसीदत् पिता नः; व्यषीदत् or व्यसीदत् पिता नः, अभ्यषीदत् or अभ्यसीदत् ॥

The anuvritti of सद and स्वंज is not to be read into this sutra. It is, in fact, a general rule and applies to verbs other than these two. As व्यस्तौत्म् न्यष्टौत्, अभ्यष्टौत or अभ्यस्तौत ॥

Śrīśa Chandra Vasu, The Ashtadhyayi of Panini (1897), via ashtadhyayi.com.