Market regulator Sebi opens innovation sandbox to fractional share pitch

Sebi okays pilot for fractional shares via its innovation sandbox; Xaults to showcase custody-led model over coming months, pending shift to regulatory sandbox

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The Securities and Exchange Board of India (Sebi) has approved a proposal from a startup to test fractional shares in its innovation sandbox, marking a potential shift in the Indian equity landscape. This represents a change in stance from 2021, when Sebi rejected a similar proposal in the regulatory sandbox, primarily due to concerns over the custody of fractional shares.

 

Fractional shares allow investors to own or trade portions of a single share rather than being limited to whole units — a practice already popular in the US.

 

Earlier this month, Bengaluru-based Xaults joined Sebi’s innovation sandbox to pilot fractional share trading. Cofounder Neeraj Singh said the company will demonstrate various use-cases to Sebi and other market participants over the next three to four months. However, full-scale live testing will proceed only if Sebi moves the firm into the regulatory sandbox.

 

Singh emphasised that the crux of their successful application was a custody framework: fractional shares would be held at the depository rather than at the broker level.

 

“We will work together with the depository and enable it at the depository level. Ownership will still sit in the user’s account or directly with the user. By enabling it at the depository, brokers will be able to offer fractionalised shares,” Singh explained.

 

Xaults also plans to collaborate with clearing corporations to experiment with smart contract-based trade settlements. A specific depository will be assigned once Sebi moves the firm forward in the process.

 

Sebi did not respond to emailed queries about fractional ownership until the time of going to press.

 

In January 2021, Zerodha and StockHissa had jointly sought approval for fractional share investments in Sebi’s regulatory sandbox but were rejected. Their model involved a holding entity buying full shares and then selling fractions through a registrar and transfer agent licensed by Sebi. A trustee would oversee the fair treatment of fractional shareholders, but transfers could occur only to and from this holding entity — posing regulatory and structural challenges.

 

Legal experts underline that Sebi’s framework restricts brokers from holding shares as principals, complicating the implementation of fractional shares.

 

“For fractional ownership to become feasible in India, the Ministry of Corporate Affairs (MCA) must amend key provisions of the Companies Act, 2013 — which currently allows only whole units. Amendments should permit the issuance and transfer of fractional shares in dematerialised form, as recommended by the Company Law Committee in 2022,” said Manendra Singh, partner at Economic Laws Practice.

 

In 2023, then Sebi chairperson Madhabi Puri Buch expressed interest in enabling fractional ownership but highlighted the need for changes in both the Sebi Act and the Companies Act.

 

“Challenges also include ensuring compliance with know-your-customer and anti-money laundering regulations, managing corporate actions like bonus shares, and updating tax laws to clarify the treatment of fractional ownership — all of which require coordination between Sebi, the MCA, and tax authorities,” Singh added. 

Trial by fractions 

• Fractional share rollout hinges on Sebi, Companies Act, and tax law changes
• Xaults to demo use-cases; eyes Sebi nod for live testing
• New model parks fractional shares with depository, bypasses brokers