Did you ever look at the share price of MRF, Page Industries, Nestle, etc., and thought to yourself, “wish I could invest in these shares?” I’m sure you did but threw the thought in a dustbin right when you realized the share price was equivalent to your total investible surplus or beyond your ability completely.
Don’t worry, you are not alone. There are many who do not invest in some stocks just because of their steep price tag. But the days are about to change. You may soon get to invest in fractional shares of the companies listed in India.
Before we get to the details like how, when, and who let’s help you understand what are fractional shares?
Remember to add this word to your stock market vocabulary
Fractional Share – Meaning
Anything less than one whole unit of a share is called a fractional share. They are also called partial shares. When you buy less than the whole unit of a share, you become a fractional shareholder in the company.
Although investing in fractional shares is quite popular in sturdy markets like the U.S., the concept is relatively new in India. You may have heard of this term while reading about investing in US stocks. Many Indian brokerages and new-age startups facilitate fractional investing in U.S. stocks. They allow you to own fractional shares of companies like Tesla, Amazon, Google, etc.
Government Hints at Issuing Fractional Shares in India
The government-formed Company Law Committee (CLC) recently met and suggested several amendments to the existing Company Act. The committee recommended putting up a structured framework to allow companies listed in India to issue fractional shares.
Currently, you have to buy at least one stock to be an eligible shareholder in the company. When implemented, investing in fractional shares will allow you to invest a particular amount in a company and get share units proportionate to it.
For instance, the price of the most expensive share (MRF) in India is Rs. 66,000 (as of April 19, 2022). If you want to buy one share of this tyre company today, you must invest the amount equivalent to the share price.
However, with fractional investing, you could buy partial shares of MRF even for Rs. 1000 or Rs. 10000. Moreover, you will be proportionately eligible for corporate actions like dividends, bonuses, stock split, etc.
More robust financial markets such as Canada, Japan, and United States have provisions for the issuance of fractional shares in their respective Companies Acts.
CLC also highlighted that this should only be introduced for a class or classes of companies. The provision in the case of listed companies could be shaped after consulting with the Securities Exchange Board of India (SEBI).
How does Investing in Fractional units of shares help?
Like we wrote above, this framework will allow you to invest any amount you wish in a high-value and fundamentally strong company.
In my opinion, this is an excellent move by the government. It will not only help investors with less surplus become a part of capital markets but also help companies raise additional share capital from the public.
More money on the table means, companies can think of expansion and tap into better growth avenues. This in turn, can have a positive impact on the companies’ top and bottom lines, ultimately resulting in high shares prices. And high shares prices mean high value for the shareholders’ money.
Thanks to the bull run over the last two years, more than 1.5crores of new investors entered the stock markets in India. We hope the trend will continue in the future as well. Fractional shares will specifically help such new entrants start small.
Take a new market investor Naveen for example. He entered the markets after witnessing the Bull Run over the last two years. He’s heard of concepts such as portfolio diversification, market capitalization, etc. Since he is a new investor he is risk-averse, meaning he does not want to take a lot of risks while investing.
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Naveen wants to invest money in several blue-chip companies, but their prices are beyond his reach. Currently, he has no other option but either invest more capital and take more risk or not invest at all.
The idea of fractional shares will help investors like Naveen. Using this method, he may be able to build a well-diversified portfolio of companies across sectors and market cap with limited funds for instance even Rs. 10,000.
Fractional Shares – Why Now?
The government wants to democratize stock market investment in the country. It is possible only when certain entry barriers are removed. While the last two years saw crores of Demat accounts being opened, only ~5% of the Indian households invest in the stock markets. This is minuscule compared to the US, the #1 economy in the world. According to statista.com, 56% (as of 2021) of the American adult population invest in the stock markets.
For a country that’s flourishing with GDP per capita rising year over year, the government intends to capitalize on this opportunity to pave the way to bolster the Indian economy. Another reason is that Indian stock market investors are now exposed to the idea of fractional shares. Many brokerages and new-age startups allow you to invest in partial units of U.S. stocks. According to the committee’s report, the government seeks to recognize new concepts, remove ambiguities, and embrace global practices.
The way forward
While this move will bring tremendous change in the equity markets, it’s not clear how and when it will be implemented. The existing company law does not allow such investments in India. The ministry is proposing amendments to the Companies Act to enable fractional share buying.
There is ambiguity around how shareholders will accrue the benefits of bonuses, rights, and share splits. While the law will provide the framework, multiple amendments may be needed from the regulatory standpoint. SEBI will have to make space for such a framework. Even tax authorities must weigh in and make changes in their rule books.
So, it is going to be an uphill task for everyone involved.
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The information and the stocks mentioned in the article are just for information purposes only. A reader/investor/trader should not consider it a buy/sell/hold recommendation from Research & Ranking.
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