INTRODUCTION
Though the concept of fractional shares is not a novice, splitting shares and establishing ownership of a share that is counted as less than one unit seems implausible. Fractional shares are not traded or made available in an open market wherein shares are traded rather it is created in activities like Mergers and acquisitions, stock splits or some other corporate actions carried out in the operational activities of the firm.[1] While the dilemma of whether fractional share has any value persists with deliberations like it gives value to the holder of the security whereas it is a gruelling process to sell, alienate or transfer the shares. In the US jurisdiction, fractional shares are considered one of the best investment options available out there in the open market. By investing in different businesses, fractional stock can help diversify a smaller portfolio and is advantageous for new investors. Parts, slivers, or pieces of stocks and ETFs known as fractional shares are smaller than a full share.[2] Indian authorities are working on regulating fractional shares in an effort to democratize the stock market. As opposed to purchasing a fixed stake at a specific price, the rule will control investing a specific sum in the return of a specific business stake.[3] To increase ease of doing business and increase market liquidity, the Company Law Committee in April 2022[4], established by the Ministry of Corporate Affairs, has proposed a number of measures, including the issuance of fractional shares, Restricted Stock Units, and Stock Appreciation Rights.[5]
CURRENT SCENARIO OF FRACTIONAL SHARE INVESTING
Companies operating in India are dissuaded from issuing fractional shares because the share capital that must be registered and distributed into shares cannot be subdivided by a subscriber into less than one share.[6] In practice, when shares become fractional for the reasons stated, the fractional shares are either converted into whole numbers of shares or are gathered and sold in the market in whole numbers for the best price, with the proceeds being distributed by a trustee chosen by the board of the company in proportion to the fractional ownership.[7] The Companies Act of 2013[8] and the Limited Liability Partnership Act of 2008 should both function more effectively in India, according to the Company Law Report’s suggestions for the government.[9] In addition to allowing companies to issue fractional shares, restricted stock units, and stock appreciation rights, the report had asked the government to amend the CA, 2013. According to the Report, if adopted, it would enable regular investors to own a portion of expensive shares for a small fraction of the price, thereby enabling new investors to purchase shares of expensive companies like MRF Tyres which are traded at Rs. 86,650 as on March 7, 2023, would be available at Rs. 8,665 for 10% shareholding.[10] This 10% would be 1/10th unit of 1 share of MRF.
Recently, Zerodha applied SEBI’s Regulatory Sandbox framework with a start-up to attempt to enable a method to allow fractional share investing in India, but the application was denied. The application sought to relax the rules pertaining to the clear bifurcation and non-fungibility of transactions carried out by brokers as principals and as agents of clients under Clauses 25.1 and 25.3 of the SEBI Master Circular for Stock Brokers.[11] This is worth mentioning because the capacity of stockbrokers in those countries like the US to execute trades with clients on a principal basis has allowed those countries to permit fractional investing. Another evolution was the inclusion of trading in fractional quantity/value on the platform of the National Stock Exchange IFSC under the Regulatory Sandbox structure. As a result, Indian retail investors are now able to trade on the NSE IFSC network through the succour of the Reserve Bank of India’s Liberalized Remittance Scheme. This would act as an impetus to authorize fractional shares in the Indian corporate setup.[12]
WHY SHOULD FRACTIONAL SHARE INVESTING BE RECOGNISED IN INDIA?
By allowing fractional share investing and granting brokerage firms the authority to determine whether fractional shares are available, the US pioneered the idea of fractional investing. Even on that front, the US strategy gives brokerage firms discretion by allowing them to determine whether or not investors can use “proxy” voting rights. These companies, in particular, conglomerates like MRF allow regular buyers to purchase fractional shares of businesses whose stocks trade on the US market for exorbitant prices in Indian rupee terms.[13] As a result, the shareholding concept as opposed to the second agency concept determines the voting rights framework for Indian companies and only for the shareholders of the company. This is because the legislation governing proxy voters in India gives proxies a very limited range of rights.[14] By investing in fractional shares, small retail investors won’t have to restrict their diversification scope by avoiding certain stocks or investing in a small number of stocks. It allows them to allocate a set amount of money to stocks or exchange-traded funds (ETFs). Investors’ wealth may also compound over time if some brokerage firms offer dividend reinvestment functions.[15]
CONCLUSION
The introduction of fractional shares in India would not be devoid of operational hurdles that might arise in the governance and regulatory norms that are to be tweaked according to the implementation which is to be addressed at the initial stage of deployment. With global jurisdictions like the UK, the US, and Canada already recognizing this phenomenon with rights being entrusted to the holder, the Company Law Committee Report is commendable having addressed this issue in light of globalization and cross-border business. The main concern in the Indian market is that not more than approximately 20%[16] of investors are holding equity instruments hence the aim of attracting more retail investors would not be abundant as expected with the rise in brokerage amount with multifarious transactions to be recorded. India is on the track to becoming a global leader in the Indian Securities Market domain, to have exponential growth, the Indian capital markets have established a number of trends in the trading world. They are among the quickest to settle trades with a T+1 cycle, and subsequent recognition of the Social Stock Exchange setup for the bourse, the concept of fractional shares is crucial for shifting investor sentiment and attracting more foreign money into India’s resilient capital market.
Author(s) Name: Aathira Pillai (Maharashtra National Law University, Mumbai)
References:
[1] “What Is a Fractional Share?” (IndiaInfoline) <https://www.indiainfoline.com/article/news-sector-others/what-is-a-fractional-share-113111404239_1.html> accessed March 7, 2023
[2] Marquit M, “How Do Fractional Shares Work?” (ForbesDecember 5, 2022) <https://www.forbes.com/advisor/investing/fractional-shares/> accessed March 7, 2023
[3] Sidhartha / TNN / Updated: Apr 12 2022, “Govt Plans Framework for Fractional Shares – Times of India” (The Times of India) <https://timesofindia.indiatimes.com/business/india-business/govt-plans-framework-for-fractional-shares/articleshow/90789872.cms> accessed March 7, 2023
[4] “Report of the Company Law Committee” <https://www.mca.gov.in/bin/dms/getdocument?mds=bwsK%252FBEAFTVdpdKuv5IR5w%253D%253D&type=open> accessed March 7, 2023
[5] Iyengar SP, “Investors Can Now Trade in Fractional Shares” <https://www.thehindubusinessline.com/markets/dream-of-holding-fraction-of-highly-priced-stocks-may-become-reality-soon/article65329064.ece> accessed March 7, 2023
[6] As per section 4(1)(e) of Companies Act, 2013
[7] “How Does a Stock Split Benefit Shareholders?” (Motilal Oswal) <https://www.motilaloswal.com/blog-details/how-does-a-stock-split-benefit-shareholders/20178> accessed March 7, 2023
[8] Hereinafter referred to as CA, 2013
[9] Supranote 4
[10] “MRF Share Price Today – MRF Ltd Stock Price Live NSE/BSE” (Groww) <https://groww.in/stocks/mrf-ltd> accessed March 7, 2023
[11] “Is Fractional Share Investing Possible in India? – Z-Connect by Zerodha” <https://zerodha.com/z-connect/rainmatter/is-fractional-share-investing-possible-in-india> accessed March 7, 2023
[12] “[Opinion] Fractional Share Investment: A Step towards Inclusive Securities Market” (Taxmann BlogJune 30, 2022) <https://www.taxmann.com/post/blog/opinion-fractional-share-investment-a-step-towards-inclusive-securities-market/> accessed March 7, 2023
[13] “How Fractional Investing Brings Big-Ticket Us Stocks within Your Reach” (Moneycontrol) <https://www.moneycontrol.com/news/business/personal-finance/how-fractional-investing-brings-big-ticket-us-stocks-within-your-reach-6531711.html> accessed March 7, 2023
[14] As per section 105 of CA, 2013
[15] Indulia B and others, “Analysing the Recommendation for Issuance of Fractional Shares in India” (SCC BlogJanuary 25, 2023) <https://www.scconline.com/blog/post/2023/01/25/analysing-the-recommendation-for-issuance-of-fractional-shares-in-india/> accessed March 7, 2023
[16] Wadhwa P, “At 14%, Indian Households among the Lowest Invested in Equities Globally” (Business Standard NewsSeptember 3, 2020) <https://www.business-standard.com/article/markets/at-14-indian-households-among-the-lowest-invested-in-equities-globally-120090300934_1.html> accessed March 7, 2023
