MCA in talks with market regulator Sebi to allow issue of fractional shares

The senior official said that Sebi has views on this issue since it impacts the listed companies and will soon be making a presentation to MCA on the matter

The Ministry of Corporate Affairs (MCA) is holding consultations with the Securities and Exchange Board of India (Sebi) for allowing the issuance and ownership of fractional shares, a senior government official said.

Fractional shares, mean a fraction instead of one whole share of a company. At present, Sebi and MCA regulations do not allow the issuance and holding of fractional shares.

A senior official said that Sebi has views on this issue since it impacts the listed companies and will soon be making a presentation to MCA.

The Company Law Committee, in its suggestions for amending the Companies Act last year, sought the introduction of fractional shares, which are popular in the US market. These shares serve the purpose for the purchase of high denomination shares, which are not easily within the reach of a retail investor.

MCA is considering this provision only for the fresh issue of fractional shares by a company and not in those cases where fractional shares get created for the time being on account of any corporate action, such as mergers.

Retail brokerages in the US, such as Robinhood, also allow investors to buy fractional shares. The idea was mooted given the increasing participation of retail investors in the market.

The International Financial Services Centres Authority at the Gift City in Gujarat has allowed the trading of fractional shares under its regulatory sandbox regime in India.

The Company Law Committee said that 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 of fractional shares would enable them to invest precise and predetermined budgeted amounts in companies whose shares are otherwise inaccessible due to high prices,” it said.

The proposed amendment suggests inserting provisions in the Companies Act that enable the issuance, holding, and transfer of fractional shares for a class or classes of companies, in such a manner as may be prescribed.

“Such shares should only be issued in dematerialised form,” it said.

Experts felt that fractional shares would not serve a huge purpose in the Indian market because, unlike the US, there are very few companies that have such high denomination shares. MRF, for instance, is one such company with a share price upward of Rs 100,000.

"Once allowed, it will bring a lot of liquidity in the market with much wider participation from investors. Shareholding will get distributed. We will have to see if this provision will be only for trading or also for ownership and voting," said Ankit Singhi, partner, Corporate Professionals.

Sebi chairperson Madhabi Puri Buch expressed interest towards the fractional ownership framework at the Global Fintech Fest held earlier this month.

Buch, however, cited challenges in going ahead from the regulator's end.

"We couldn't welcome it in the sandbox programme because it is not permitted in the Sebi act itself," she added.

(Khushboo Tiwari contributed to this story).