[Opinion] Fractional Share Investment: A step towards inclusive Securities Market

[2022] 139 taxmann.com 550 (Article)

The global securities market has witnessed an unprecedented surge in retail investor participation since the pandemic. Although a steady increase was apparent in the pre-pandemic period, Covid-19 triggered an exponential influx of retail investors in the stock market with remarkable participation by millennials and Gen-Z. India is no exception. According to SEBI data, in the 10-month period of FY22 ending January 31, 2022, approximately 3 crore new demat accounts were opened in India – about 4 times the count in FY 2020. While the quantum of funds that retail investors infuse may not be sizeable, but the sheer volume they generate owing to their number has a proven potential to disrupt the market. The GameStop frenzy driven by Reddit users where they bet against hedge funds by creating a short-squeeze which resulted in a price spike nearing 1500% in about two weeks and the financial stability brought in amidst the pandemic by retail investor participation are testaments to this potential.

With this revolutionary development, an emerging sentiment of fractional share investment has been voiced by the market participants in India. Fractional shares allow investors to buy a slice of a company which could be less than one full share. For instance, the price of one share of MRF was INR 76,500 as on the close of trading session on June 3, 2022. With fractional investing, one could buy 0.5 share of MRF for INR 38,250 or 0.1 share for INR 7,650. Essentially, fractional investing allows investors to choose the amount of money they want to invest rather than the number of shares they want to purchase. This helps in mitigation of barriers to entry in big-ticket stocks and enabling portfolio diversification with a small pocket. It also allows amateur investors to get a taste of the stock market and test the waters. In the past, the proliferation of online trading platforms offering commission free trading has made fractional investing possible and lucrative for small retail investors in countries such as the United States, Japan, Canada, UK, and Australia. India finds itself in an identical situation with popular brokers such as Zerodha, Upstox, and Angel Broking offering zero brokerage accounts. Henceforth, the need for fractional investing will only grow as market participation increases.

Interestingly, Zerodha, along with a start-up, had made an application under SEBI’s Regulatory Sandbox framework to try to enable a way to allow fractional investing of shares in India, but the same was rejected. The application primarily sought relaxations to Clauses 25.1 and 25.3 of the SEBI Master Circular for Stock Brokers which stipulate regulations relating to clear bifurcation and non-fungibility of transactions undertaken by brokers as principals and as agents of clients, timelines for payments and delivery of securities to clients, and the underlying aspects thereto. This is noteworthy because countries where fractional investing is permissible have been able to allow it by virtue of the stockbrokers’ ability in such countries to execute trades with the clients on a principal basis; something which is not permissible under the current framework in India. Typically, a broker in the US would either purchase one full share from a stock exchange and sell fractions of it to investors on a principal basis or accumulate orders for fractional shares from investors until such orders aggregate to one share. This is not possible in India as brokers are only allowed to act as agents and all orders placed by investors are sent to stock exchanges where they are executed.

As a step towards recognition of emerging concepts, the Company Law Committee in its report dated March 21, 2022 has recommended amendments to the Companies Act, 2013 to enable issuance, holding and transfer of fractional shares. The amendments proposed in the report include amendment to Section 4(1)(e)(i) and paragraph 4 of Table F – Schedule 1 which contain restrictions to recognition of fractional shares. The committee categorically stated that these recommendations pertain to only fresh issue of fractional shares and not to fractional shares emanating from corporate actions such as merger, bonus issue or rights issue. It is also clarified that such shares must only be issued in dematerialized form. In another development, the National Stock Exchange IFSC introduced trading in US stocks on its platform under the Regulatory Sandbox framework with an option to trade in factional quantity/value. Resultantly, Indian retail investors can trade on NSE IFSC platform under the Liberalized Remittance Scheme prescribed by the Reserve Bank of India. With the CLC report out now, the voice for recognition of the concept of fractional investing is gaining momentum.

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