Explained: What Are Fractional Shares & Are They Available In Indian Stock Market?

MRF's share price of more than Rs 1 lakh, Nestle India's share price of nearly Rs 23,000, and P&G India's share price of more than Rs 15,000 are just some of the examples of high-priced stocks in the Indian stock market.

The high share price of many such stocks often makes us wish for two things: either their price was lower or if we had the concept of fractional shares in India.

What Are Fractional Shares?

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Curious about the latter? Well, fractional shares are exactly what they sound like¡ªportions of a stock. So, rather than buying one whole stock for that high price, you could buy a fraction of it. That way, you end up owning a piece of that stock without having to dig deep into your pocket. Like, if you want a piece of cake and not the entire cake, right?

Simply put, a fractional share is a portion of a stock that is less than one full share. Fractional shares are usually the result of corporate actions such as stock splits or bonus shares.

An Example To Help You Understand

Suppose if you wanted that MRF stock itself, which currently has a price of more than Rs 1 lakh per share, a fractional share concept would help you buy a portion of one share for, say, Rs 10,000 or Rs 5,000.

Or, for example, if a relatively lower-priced share like that of TCS (Tata consultancy services) currently costs about Rs 3,300 per share, you could have bought fractional shares by investing a smaller amount, like Rs 500 or Rs 1,000, if fractional investing was available.

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How Does Fractional Investing Work?

As factional shares are allowed in the US, let's take their example to understand how it works.

US broker-dealers enable fractional transactions by transacting with clients on a principal basis, keeping the ownership of shares under the street name by default, as per Zerodha. This allows them to maintain ownership of the shares and create fractional units for transacting with their clients (on a principal basis) by creating book entries for each client owning a part or multiple parts of shares.

Think of it this way: When US investors buy shares, they are held in the broker¡¯s name, and the broker maintains a ledger of individual clients and assigns the shares.

Brokers used the same ledger mechanism for recording stock ownership to offer fractional investing. When an investor buys a fraction of a stock, the broker-dealer buys the stocks, divides them among investors, and holds the stock on its own books. Fractional shares can only be sold back to the broker-dealer from whom they were purchased. As you might have realised, the price at which these fractional orders are executed can be an issue. But the SEC has defined fiduciary rules that broker-dealers must follow in terms of what price they transact principally with their clients, called the National Bid and Best Offer guidelines. The guidelines ensure that fractional orders aren¡¯t executed at prices higher than market prices.

For broker-dealers or market participants, there isn¡¯t much risk in offering fractional shares. The broker-dealers at all times only bear a maximum market risk of 1 whole share of the stock in which they are enabling fractionals. Broker-dealers maintain inventory of a full share and pass book entries based on the fractional orders from clients. Broker-dealers typically follow certain internal policies regarding fractions being made available in a certain share, such as 0.1% of a share, and all orders have to be made in multiples of such a fractional percentage.

For example, if Stock X has a market price of $1,000, the broker-dealer would allow clients to transact the stock at multiples of $1 (i.e., 0.1%). The broker-dealer would keep an inventory of 1 share of Stock X on its books worth $1000. If there are now 3 clients who place orders of say $200, $350, and $150, the broker-dealer would pass separate book entries towards Client A, Client B, and Client C and have a remaining inventory of $300 under its own name in its books.

The maximum market risk towards the stock price that the broker-dealer would be taking, in this case, is $300. The maximum at all times, in this case, would be the price of one share, i.e., $1000.

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Does India Have Fractional Investing?

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No. Currently, fractional ownership is not available in the Indian stock market.

But last year, investors¡¯ dream of holding a fraction of highly-priced Indian stocks got a glimmer of hope when the Company Law Committee formed by the Ministry of Corporate Affairs recommended various measures, including the issuance of fractional shares, Restricted Stock units, and Stock Appreciation Rights, besides allowing companies to hold a shareholders meeting in a hybrid mode to boost ease of doing business and improve liquidity in the market, as per the HBL report. The committee had clarified that fractional shares should involve the company¡¯s fresh issue of them.

Also, the International Financial Services Centres Authority had around that time allowed trading in fractional shares of global stocks under its regulatory sandbox regime in India. NSE IFSC also started trading many US Stocks.

Another glimmer of hope that maybe the fractional share concept can someday be allowed in India sooner or later is when India's stock market regulator, the Securities and Exchange Board of India (SEBI), proposed in May this year to regulate all online platforms that offer fractional ownership of real estate assets. The move is widely expected to institutionalise the segment and help attract more capital from both domestic and offshore investors.

However, as per Zerodha, since Indian brokers can only act as agents for clients and not the principal, offering fractional investing isn't yet possible. In India, brokers are just agents who collect orders and send them to the exchanges. Once an order is executed, the shares are held in the names of the clients in a demat account with a depository like CDSL or NSDL. Many complex regulatory changes are required if fractional investing is to be made possible in India.

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