What are fractional shares?

The MRF share was in the news recently as it went into seven digits - the share price crossed a lakh in value. How many people in India can afford to buy an MRF share? The other expensive shares in India are Page Industries and Honeywell Automation. Currently, they are trading over Rs 37,000.

The majority of investors do not have a portfolio large enough to have these shares in their portfolio. Even if the portfolio size is Rs 5,00,000, owning any of these three shares (and other large-value shares) will hamper the investors' portfolio.

What is the solution? The solution is fractional shares. As per the news, the Securities and Exchange Board of India (SEBI) is planning to introduce the concept of fractional shares. It will allow you to invest in shares of high-value companies, making the stock market more accessible than ever before to investors.

Benefits of Fractional Shares: For Investors

Below are the benefits of fractional shares for investors:

Accessibility: Fractional shares allow even small investors to access high-priced stocks that they might not be able to afford in whole units. It increases the inclusivity of the stock market.

Diversification: Fractional shares enable you to diversify your portfolios more effectively. You can spread your investments across a wide range of stocks, reducing risk. Even with a Rs 50,000 portfolio, you can have a decent stock count in your portfolio.
Cost-Efficiency: You can allocate your funds more efficiently by investing in fractional shares. It can lead to better utilization of your capital.
Risk Management: By owning fractional shares, you can spread your risk across multiple investments. It mitigates the impact of poor performance by a single stock on your overall portfolio.
Rupee Cost Averaging: You can employ a dollar-cost averaging strategy more easily with fractional shares. You can consistently invest a fixed amount of money at regular intervals, buying more shares when prices are low and fewer shares when prices are high.

Example: You can create a portfolio of quality stocks, including large-cap companies, by investing Rs 1000 monthly. At present, it would be tough for you to create a portfolio with a small monthly investment.

Benefits of fractional shares: To the Company

Here are the benefits of fractional shares for the company:

Wider Investor Base: Offering fractional shares can attract a broader range of investors, including those with limited funds or individuals who prefer to start with small investments. At present, Indian companies have to go with a stock split when the price increases above a limit. Fractional shares can help increase the company's shareholder base.
Liquidity: Fractional shares can enhance the liquidity of a company's stock. With more investors holding fractional shares, there may be increased trading activity, which can lead to a more liquid market for the company's stock.
Market Capitalization Growth: A larger investor base and higher liquidity can lead to an increase in the company's market capitalization, potentially boosting its reputation and attractiveness to investors.

How do fractional shares work?

In India, fractional shares are difficult under the current laws. However, in the US, fractional shares have been around for a while. Let us see how fractional shares work in the States and then figure out if the same can happen in India.

To buy fractional shares in the US, investors must have a brokerage account with a platform that offers fractional share trading. Most major brokerage firms in the US offer this feature.

Here is an important thing to know: US companies do not issue fractional shares. Then, how do investors end up owning fractional shares? It is possible because brokers in the US can buy and hold shares in their name.

Let us assume that there is a broker X. Broker X holds ten shares of Amazon. When an investor places an order to buy a stock, they can specify the dollar amount they want to invest rather than the number of shares they want to purchase. The brokerage platform X calculates the fractional share amount based on the specified dollar amount and the current share price. If a stock trades at $100 per share and the investor invests $50, they will own 0.5 (or 50%) of a share. In this case, broker X will give away 0.5 shares and keep the remaining 9.5 under his name.

Can fractional shares work in the same way in India?

In India, investors cannot own fractional shares in the same way. This is because, in India, brokers cannot have shares in their name. So they cannot act as dealers and distribute fractional shares. Unless SEBI changes the rule, fractional shares similar to those in the US cannot be issued in India.

The solution

One of the solutions could be that companies issue fractional shares themselves. However, even here, there is a problem. Under the Companies Act, Indian companies cannot purchase, sell, or trade fractional shares. According to the Act, subscribers to the Memorandum of Association (MoA) must agree to subscribe to a minimum of one full share.

As per reports, it seems SEBI will change this rule to make fractional shares in India a reality. SEBI is working with the Ministry of Corporate Affairs to amend this Act. Once the rule is amended, it will allow Indian investors to own fractional shares.