In the world of investing, there exists a financial innovation known as fractional trading, a concept that has the potential to democratise access to the stock market and revolutionise the way we think about investing in shares of publicly traded companies. Imagine for a moment that you're drawn to the allure of investing in a formidable titan like MRF, a company that commands a share price of approximately ₹1.09 lakh. To become a shareholder, one would traditionally have to part with a substantial sum, well over ₹1 lakh. This formidable entry barrier has historically discouraged many potential investors from taking a stake in such high-value stocks.
This is where fractional trading steps in as a game-changer. The essence of fractional trading lies in its simplicity; it allows investors to purchase not just whole shares, but a fraction of a share. Picture this scenario: rather than shelling out a daunting ₹1 lakh, you can now enter the realm of MRF or any other high-priced stock by investing, let's say, ₹25,000. With this sum, you can acquire a quarter or even tinier fractions of a single share. This innovation opens the door to a world of possibilities, making it accessible for a wider range of investors, from the seasoned market players to newcomers.
The practical implications of fractional ownership extend far beyond MRF alone. Several Indian companies boast individual share prices that soar beyond ₹20,000, including giants like Page Industries (₹39,612), Honeywell Automation India (₹39,308), Shree Cement (₹25,681), Abbott India (₹22,800), and Nestle India (₹21,922), among others. Fractional trading effectively dismantles the monetary barricades surrounding these high-value stocks, enabling more people to invest in them without having to commit large sums of capital upfront.
It's worth noting that fractional ownership is not a novel concept; it has already been embraced and implemented in the United States' financial markets. American investors have been leveraging fractional shares for years, gaining access to some of the world's most prominent companies such as Apple, Meta (formerly Facebook), and Alphabet, among others, without the need for exorbitant investments.
Fractional shares, in their simplicity, carry a multitude of benefits that can transform the way we invest:
Increased Market Participation: Currently, only 3% of Indians invest in stocks, lagging far behind China's 13% and the US's 55%. Fractional shares could entice more people to enter the market, making investing accessible to a broader population.
Enhanced Diversification: Consider someone with ₹5 lakhs to invest eyeing a single share of MRF. Buying one share would mean 20% of their portfolio is tied to a single stock. Fractional shares allow for easy diversification by providing access to more companies, reducing the risk associated with concentrating all investments in one entity.
Direct Indexing: Fractional shares enable direct indexing, where you can own all the individual stocks in an index in the same proportions. This approach offers customization and flexibility, allowing you to use broad indices like Nifty 100 as a foundation and tailor them to your preferences. Additionally, it opens the door to advanced strategies like tax-loss harvesting, which is not possible with traditional index funds.
Fractional shares are indeed a promising innovation in investing, but their implementation in India faces regulatory hurdles, primarily stemming from the existing Companies Act. Here's why fractional shares can't be offered under the current regulations:
Companies Act Limitations: The Companies Act, which governs corporate operations in India, currently prohibits the purchase, sale, or trading of fractional shares. According to this act, subscribers to the Memorandum of Association (MoA) must agree to subscribe to a minimum of one full share. This means that fractional ownership is legally restricted, making it difficult for individual investors to own fractions of shares.
Broker-Dealer Distinction: In countries like the United States, where fractional investing has gained traction, brokers often act as both brokers and dealers. They can buy and hold shares in their own name, facilitating the fractional share transactions. However, in India, brokers can only serve as intermediaries to facilitate trades. They can't operate as dealers who hold shares in their own name. This distinction creates a significant regulatory barrier to implementing fractional shares in India.
Regulatory Complexity: The Indian regulatory framework is structured around brokers acting as agents of clients and not as principals. When an order is executed, shares are held in the name of clients in demat accounts with depositories like CDSL and NSDL. Introducing fractional shares would require a substantial overhaul of these regulations and processes, which is a complex and time-consuming endeavour.
In summary, while fractional shares have the potential to revolutionise investing by making it more accessible and diversified, their implementation in India faces significant legal and regulatory challenges, primarily due to the Companies Act and the broker-dealer model. It would require substantial changes in the existing regulatory framework and a potentially radical shift in how brokers operate for fractional shares to become a reality in the Indian market.
Recent news about SEBI's collaboration with the Ministry of Corporate Affairs to amend the Companies Act represents a step in the right direction, but the journey towards enabling fractional investing in India is likely to be a complex and gradual one.
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(Disclaimer: The views expressed in this article are strictly personal opinions of the author and do not necessarily reflect the views or opinions of the company or organization they may be associated with. This article is intended for informational purposes only and should not be construed as legal or professional advice. Readers are encouraged to seek professional guidance or consult relevant experts for specific legal or professional matters.)
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