One of the 26 changes proposed by the Company Law Committee (CLC), in its report released in March 2022, pertains to recognizing issuance and holding of fractional shares. The CLC was constituted by the ministry of corporate affairs in 2019.
A fractional share refers to a part of a whole, which means less than one share unit. Fractional shares may arise due to corporate actions like mergers, issue of bonuses, or rights issues. The Companies Act does not permit holding of fractional shares. Section 4(I) of CA-13 reads thus: “the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe, which shall not be less than one share.”
Furthermore, Section 4(1)(e)(i) restricts the ability of subscribers to hold fractional shares. “Except as required by law, no person shall be recognised by the company as holding any share upon any trust, and the company shall not be bound by, or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share, or any interest in any fractional part of a share, or (except only as by these regulations or by law otherwise provided) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder.”
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The CLC report makes a very pertinent point here: “While retail investors may want to invest in certain companies, they may not have the purchasing power to buy a whole share due to the high price of a single unit. Allowing holding and trading fractional shares would enable them to invest precise and predetermined budgeted amounts in companies whose shares are otherwise inaccessible due to high prices.”
For instance, most retail shareholders cannot afford to buy shares of MRF, which are trading at ₹86,542 apiece as of 21 April, or that of Page Industries trading at ₹39,921 per share or many other companies whose scrips are trading above ₹10,000.
You can buy a fractional share of Apple, a US-listed company, from India but you cannot buy that of, say, Nestle India (which is currently trading at ₹20,515.)
When you make an investment of say ₹5,000 in an equity mutual fund via a systematic investment plan (SIP), the fund manager pools money from many investors like you to invest in a portfolio of 30-50 businesses. But if you invest that ₹5,000 every month in just one or two stocks, you are creating a highly concentrated portfolio. That is very risky.
If fractional shares are allowed, a small monthly SIP amount of ₹5,000 can get you exposure to a diversified set of high quality businesses. This will democratize investing in direct equities. Millions of young Indian investors already have an SIP in their MF portfolio. They just need some guidance and environment to create a long-term stock SIP portfolio and automate it. Allowing fractional shares for investors can be a welcome step in that direction.
Ankit Kanodia is founder of Smart Sync Services, a Sebi registered investment advisory firm.