Centre looks to introduce fractional shares; here's how small investors benefit

The Centre is working on a framework for fractional shares, which is a very popular investment concept in the US. Allowing fractional share sales is among the recommendations of the government-constituted Company Law Committee (CLC). Under the proposed system, an investor can buy a part of a share, as against the current system where only whole shares can be bought.

For instance, the investor can buy 25 per cent of a share for Rs 200, instead of buying the entire share for Rs 800. This way, even small investors can pick up a stake, however tiny, in a company’s whose shares are high-priced.

According to the CLC recommendations, the law can be amended to insert provisions that enable issuance, holding and transfer of fractional shares. Such shares should only be issued in the dematerialised form.

What the CLC said 

The CLC was constituted by the Corporate Affairs Ministry to make recommendations on changes aimed at facilitating and promoting greater ease of doing business as well as ensuring effective implementation of the Companies Act, 2013 and the Limited Liability Partnership Act, 2008.

“For listed companies, such prescriptions may be made in consultation with SEBI. It is also clarified that this recommendation only pertains to cases that would involve a fresh issue of fractional shares by the company and not to those cases where fractional shares get created for the time being on account of any corporate action,” the CLC report stated.

How will the small investor benefit?

By bringing in this change, the government intends to democratise the purchase of stocks. This will be a major shift from the current process, where an investor has no option but to buy at least one share of a company at the trading price. In contrast, fractional shares allow an individual to invest a fixed amount against the purchase of a particular stock.

Experts say that one of the factors why certain shares trade at high prices is a low float in the market. If the CLC recommendations are accepted, people will be able to invest even a small percentage, thus allowing investors with less capital to buy top shares like MRF, L&T etc.

At present, Indian investors putting their money in US stocks can invest in fractional shares through online mode. However, the existing law in India doesn’t allow buying fractional shares. For that, the Companies Act will have to be modified – a proposal mooted by the Ministry of Corporate Affairs through the CLC.

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The government wants more and more Indians to investment in equities. At present, just about 5 per cent of Indian household assets in equities, mostly through mutual funds.

Other proposals

The CLC, currently chaired by Corporate Affairs Secretary Rajesh Verma, has also suggested prohibiting the conversion of co-operative societies into a company and replacing requirement of furnishing affidavits with the filing of self-certification/ declaration.

The ministry has sought comments from stakeholders till May 6 on the CLC report, which was submitted to the government last month.

Others suggestions of the panel include allowing certain companies to revert to the financial year followed in India, facilitating certain companies to communicate with their members in only electronic form, allowing companies to hold general meetings in virtual, physical or hybrid modes, and creating an electronic platform for maintenance of statutory registers by companies.