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Govt, Sebi in favour of fractional shares

Some of the priciest listed shares in India include MRF Ltd, Honeywell Automation India Ltd and Page Industries Ltd, which closed at  ₹109,675.40,  ₹40,830.20, and  ₹39,090.85, respectively, on the BSE on Tuesday. (Mint)
Some of the priciest listed shares in India include MRF Ltd, Honeywell Automation India Ltd and Page Industries Ltd, which closed at 109,675.40, 40,830.20, and 39,090.85, respectively, on the BSE on Tuesday. (Mint)

Summary

  • Move may lift retail participation, diversify company ownership

The ministry of corporate affairs and the capital markets regulator are in favour of allowing certain classes of companies to issue so-called fractional shares, a person aware of the development said.

Both believe that fractional shares, which are less than full shares, could increase retail investors’ access to high-value shares, boost liquidity and help companies further diversify ownership, the person cited above said on condition of anonymity.

The ministry and the Securities and Exchange Board of India (Sebi) have already had a discussion in this respect, and the regulator will give its views in a detailed presentation, the person added.

Graphioc: Mint
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Graphioc: Mint

“Allowing fractional shares would require an amendment to the Companies Act. Probably the same norms will be set for both unlisted and listed entities, but it would be more useful for listed entities," the person said.

The Companies Act sets out the basic regulatory requirements governing all companies, with listed entities having to meet additional compliance requirements mandated by the market watchdog.

Emails sent to spokespeople for the corporate affairs ministry and Sebi on Monday seeking comments for the story remained unanswered.

The proposal to allow fractional shares was originally made last year by the company law committee, an advisory body attached to the ministry.

Some of the priciest listed shares in India include MRF Ltd, Honeywell Automation India Ltd and Page Industries Ltd, which closed at 109,675.40, 40,830.20, and 39,090.85, respectively, on the BSE on Tuesday. A steep price puts many such stocks beyond the reach of a large number of small investors. However, the committee’s proposal to allow fractional shares was specific to the context of issuing fresh capital.

“At present, small investors may not be in a position to invest in high-priced shares in one go. Allowing fractional shares will surely benefit small investors and boost the market to some extent. The minimum fraction allowable has to be decided by the government and Sebi," said Amarjit Chopra, a member of the company law committee that made the recommendation. Chopra is also a former president of the Institute of Chartered Accountants of India.

The panel had said that markets like Canada, Japan and the US have provisions allowing issuance, holding and trading in fractional shares. During corporate transactions, fractional entitlements to shares do get created, but the investors get only their sale proceeds. Currently, the Companies Act prohibits the issue of such shares and insists that new companies have to specify in their charter the share capital and the number of shares subscribed, “which shall not be less than one."

The move comes in the wake of an increase in equity market participation by investors. Demat accounts needed for managing investments in electronic form have seen a sharp jump from 40 million in FY20 to 128.3 million at the end of August, Sebi data showed, signifying wider market participation, financial inclusion and changing risk perception about financial assets. In FY22 and FY23, over 59 million demat accounts were added.

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