SEBI has asked the Ministry of Corporate Affairs to allow fractional shares in the Companies Amendment Bill to help retail investors buy expensive stocks. While this proposal aims to boost liquidity, it faces scrutiny over potential risks to voting rights and complex settlement processes.
The Securities and Exchange Board of India (SEBI) has formally proposed that the government include provisions for fractional shares in the upcoming Companies Amendment Bill. Currently, the Companies Act, 2013, requires shares to be held as whole units. Fractional shares—which represent less than one full share—are typically only created as temporary outcomes of corporate events like mergers, bonus issues, or rights offerings.
Expanding Retail Investment Access
The primary goal behind SEBI’s push is to lower the entry barrier for retail investors. In the current market, some high-value stocks trade at prices that can be expensive for small individual investors. By allowing the purchase of fractional shares, investors could theoretically build a diversified portfolio even with limited capital. This change is intended to increase market liquidity and improve price discovery by bringing more participants into the ecosystem.
The proposal stems from recommendations made in the 2022 Company Law Committee report, which suggested integrating several equity-linked ownership structures that are not explicitly covered under existing law. While the Companies Amendment Bill recently introduced new compensation instruments like Restricted Stock Units, it did not initially include provisions for fractional share ownership.
Governance and Regulatory Challenges
Despite the potential benefits for retail participation, the implementation of fractional shares introduces significant regulatory and operational complexities. A major concern voiced by policymakers involves corporate governance, specifically regarding voting rights. Under current frameworks, voting is tied to whole shares. Allowing fractional holdings raises questions about how voting influence would be calculated and exercised without diluting the rights of minority shareholders or complicating company meetings.
Beyond governance, there are practical risks regarding the technical aspects of trading. The infrastructure for clearing, settling, and holding these partial assets requires substantial upgrades. Regulators must also ensure that KYC (Know Your Customer) and anti-money laundering (AML) protocols are robust enough to handle the increased complexity of tracking partial ownership. Because these assets are not currently recognized under the main company law, any move to legalize them would require significant alignment between the Companies Act, SEBI’s own market regulations, and the tax code.
For now, the proposal remains a legislative discussion. Investors and market participants are monitoring the progress of the Companies Amendment Bill to see if and how these provisions are incorporated, as the transition requires careful balancing between improving market access and maintaining the integrity of corporate voting and governance standards.