Fractional Shares in India - How does it work?
Fractional shares, a concept under consideration by the Securities and Exchange Board of India (SEBI), could transform how retail investors participate in the Indian stock market. This innovative approach allows individuals to buy a portion of a high-priced share, making investments more accessible to a broader demographic. In this blog, we explore the potential implications and advantages of introducing fractional shares in the Indian stock market.
How Fractional Shares Work
This innovative approach allows individuals to buy a portion of a high-priced share, making investments more accessible to a broader demographic. In most parts of the world, brokers facilitate fractional share transactions. Companies issue full shares, and broker-dealers hold them, dividing them into fractional ownership for investors. This model relies on brokers functioning as both buyers and dealers.
However, Indian regulations currently don't permit brokers to operate as dealers. This could be a significant hurdle in implementing fractional shares unless a radical shift in regulations occurs.
Benefits of Fractional Shares
Below are the benefits of fractional shares:
1. Enhanced Accessibility
High share prices can be prohibitive for retail investors. Fractional shares would make it affordable to invest in premium stocks with limited capital, potentially enticing more individuals to participate in the market.
2. Better Investment Choices
Retail investors often opt for cheaper penny stocks due to their lower individual share prices. With fractional shares, high-quality stocks become more accessible, encouraging investors to make informed choices.
3. Improved Diversification
Diversification is crucial for risk management. Fractional shares enable investors to spread their funds across multiple companies easily, reducing the risk associated with overexposure to a single stock.
4. Minimal Need for Stock Splits
Companies won't need to conduct stock splits to make their shares more appealing to retail investors. This saves time and costs for both companies and investors.
5. Broader Market Participation
As a consequence of increased affordability and accessibility, more people are likely to explore the stock market, potentially narrowing the gap between India's 3% stock market participation and higher percentages in countries like China (13%) and the US (55%).
Also read: Top Small Cap Stocks You Can Invest in 2023
Challenges and Considerations
1. Limited Voting Rights
Owning fractional shares might not grant investors the right to vote on company matters, limiting their influence on corporate decisions.
2. Potential Brokerage Fees
Frequent trading of fractional shares could lead to the accumulation of brokerage-related fees, which investors need to consider.
The Way Forward
To make fractional shares a reality in India, SEBI and the government would need to address regulatory obstacles. This could involve permitting companies to issue fractional shares or allowing brokers to function as both buyers and dealers.
Also read: Best Real Estate Stocks in India
The Bottom Line
The introduction of fractional shares could democratize stock market participation in India, making it more accessible and affordable for a broader range of investors. While there are challenges to overcome, such as regulatory changes and potential limitations on voting rights, the benefits of enhancing accessibility, diversifying investments, and reducing the need for stock splits make it an attractive proposition for both investors and companies. As this concept evolves, India's stock market landscape may witness a positive transformation, potentially narrowing the participation gap with other global markets.
Follow us on Instagram.