Aishwarya and Venkat meet over weekend and an interesting conversation follows.

Aishwarya: Hey what is this new buzz of fractional shares that has been proposed by Ministry of corporate affairs (MCA).

Venkat: Oh! If news reports are to be believed, it seems that MCA is in talks with SEBI to allow issuance and ownership of fractional shares.

Aishwarya: Ok, but what are these fractional shares? How does it work?

Venkat: Fractional shares as the name suggests are part of a single share arising out of corporate actions such as bonus or splits. Owners of fractional shares have same rights as other shareholders of the company and get dividends etc. on percentage basis. In India, currently fractional shares cannot be sold in the open markets. Instead the company appoints a trustee to buy back the fractional shares from investors.

However, in developed markets e.g., in USA, this is not the case. There trading in fractional shares is an ongoing thing. The brokerages and fintech companies of US started the concept of investing in fractional shares. This was in order to let retail investors invest in some of the popular “FAANG” companies whose shares were trading in high triple or quadrable digits. Fintechs offering international investing platform in India were also making available buying of fractionals shares, making it possible for Indian investors to buy fractional quantities of high prices stocks in the US.

The brokers there generally buy stocks of these companies and sell fractional units to investors. Investors can sell these fractional shares back to the broker who puts it together with other fractional shares and sells it in the market as a whole share.

Aishwarya: So, what is the rationale behind bringing it to India?

Venkat: The average SIP ticket size in mutual funds is around ₹3,000, if this is to be taken as a yardstick then an average investor is willing to invest this much amount every month. There are many good stocks which cost more than ₹3,000 individually. With fractional shares coming in, investors will be able to invest in such stocks with the capital they have. This system is also expected to bring a lot of smaller retail participants in the market and thereby increasing liquidity in the market. 

Aishwarya: Nice. It will be an interesting development in the markets.