Tag: Indian securities market

Of US fractional investing and the lesson for India

Fractional share investing is a current fintech innovation. Its affect was seen in the course of the pandemic, when an inflow of latest traders was seen in sure worldwide jurisdictions. In India, the International Financial Services Centre Authority (IFSCA) had in 2022 approved the dealing of fractional shares below its regulated sandbox system; which enabled retail traders to purchase and promote US equities throughout the limits set by Reserve Bank of India’s Liberalized Remittance Scheme (LRS). The idea of fractional shares is lacking in an absolute type in Indian markets although it’s supported in some type by way of mutual fund and ETF investing.

Fractional investing permits individuals to buy a portion of the inventory quite than as a complete. For instance, if the worth of a share is ₹500, then one may even procure it at one-tenth the price with fractional investing. Popular shares in India are prohibitively costly for small traders to purchase. Fractional shares would permit for inclusive entry to small traders, enhance their portfolio diversification and democratize securities markets.

In the US, fractional shares regime was launched by brokerages and fintech corporations. They propagated possession of enormous shares, akin to these of FAANG— Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet)—to retail traders and in flip discovered methods and means to make {that a} actuality by permitting fractional share buying and selling. Thereafter, the regulators backed these brokerages after testing their preparedness and introducing a regulatory construction to spend money on fractional “shares and ETFs”. In this set-up, a high value share is bought by the broker and split among interested investors in proportion to their investment.

These brokerages leverage block-chain technology to maintain a ledger for each investor having fractional ownership of shares. This is called the distributed ledger technology (DLT) which helps in maintaining the records of ownership rights, voting rights, dividends, and bonus issues, while ensuring micro-level transparency and minimising cost of operations. The brokers keep track of the investor’s identity in the ledgers, even if majority shares are registered in the brokers’ names. This has been a tried and tested mechanism in the US which has enabled investors to comfortably engage in fractional shares investing. Thus, there could be some takeaways from this for India.

Technological capabilities would certainly not take much time to make fractional shares a reality, however, the Indian securities market landscape is yet not prepared. Fractional shares need to be defined in the regulatory statutes; roles and responsibilities of MIIs and various intermediaries such brokerages, registrar and transfer agents need to be defined; rules for usage of funds/securities need to be laid down. Various aspects related to shareholders rights, shareholders activism, investor protection, and various types of frauds need to be pondered over.

Another important takeaway is that fractional investing in the US attracted millennials and gen Z who are prone to social media influence. This was showcased through the infamous ‘Gamestop’ episode wherein the company witnessed a meteoric rise of its share prices in spite of institutional investors betting massively against its success. Here, tiny trades by retail investors based on viral online trends and discussions rather than financial analysis caused significant price fluctuations. Fractional trading platforms and apps providing quick accessibility to retail investors were instrumental in this phenomenon. Thus, an important lesson is that inclusive access to small investors through fractional shares need to be complemented with financial education.

Since this trading innovation relaxes capital constraints faced by a retail investor, it could prove to be detrimental if misused by people for artificially inflating or deflating the stocks. Also, fractional investing could result in some people speculating in ‘meme stocks’ (stocks gaining popularity due to social media sentiments) that promise a fortune thereby leading to dysfunctioning markets. We need to embrace the experiences and lessons from other countries so that we err less and focus on evolving aspects of fractional share investing, thus resulting in the responsible democratization of Indian securities markets.

Kuldeep Thareja, Mitu Bhardwaj & Rasmeet Kohli are with the National Institute of Securities Markets. The views expressed in this article are personal.

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Updated: 26 Sep 2023, 08:35 PM IST

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September 26, 2023
ASBA: A Game-Changer for Indian Investors

The Securities and Exchange Board of India (Sebi), the nation’s main regulator for securities markets, has prolonged been devoted to empowering merchants. Since its inception in 1992, Sebi has launched quite a few regulatory measures to protect the pursuits of merchants and promote trustworthy practices throughout the Indian securities market. One such initiative that has garnered considerable consideration post-Sebi’s latest board meeting is the Application Supported by Blocked Amount (ASBA) facility for secondary market shopping for and promoting, which ensures to be a game-changer for Indian merchants. The facility relies on the blocking of funds for purchasing and promoting throughout the secondary market by means of UPI.

As of now, ASBA is used for subscribing to preliminary public offering (IPO). It is a value mechanism that permits merchants to dam their funds of their checking account instead of transferring the money to the vendor’s account via the IPO subscription course of. It ensures the safety of investor funds and streamlines the whole method of constructing use of for shares in an IPO. By making use of for an IPO by means of ASBA, there was a reduction throughout the time taken for refunds, thereby providing bigger liquidity to merchants. They even have the selection to withdraw their utility at any time via the bidding course of.

The current settlement course of throughout the Indian secondary market shopping for and promoting takes T+1 days, the place T denotes the day of the transaction. It implies that the funds are blocked throughout the investor’s account for sometime sooner than the shares are credited to the demat account. The implementation of ASBA-like facility in secondary market shopping for and promoting would enable merchants to dam their funds throughout the checking account whereas placing the order. Once the order is executed, the funds will keep blocked until the shares are credited to the demat account. We might say that this will finish in a real-time settlement.

The utility of this facility can have a number of benefits for Indian merchants. Firstly, Investors can benefit from enhanced authority and transparency over their funds by blocking their money in a monetary financial savings account. This technique ensures that their money is not mixed with totally different merchants‘ funds in the stockbroker’s pooled account. Furthermore, merchants can earn curiosity on their blocked funds until the time of exact debit, together with to the overall revenue. Secondly, it might in the reduction of the possibility of fraud and misappropriation of funds, as a result of the funds are blocked throughout the investor’s account.

However, to make sure that ASBA-like facility to realize success, the secondary market shopping for and promoting would require necessary changes throughout the present infrastructure. The present system of brokers and depositories would should be upgraded to help real-time settlement. Moreover, the employment of ASBA-like facility would require necessary funding in experience and training. It would moreover require changes throughout the present guidelines and approved framework to help the model new system. Also, it is liable to impact brokers, as a result of it might end in a reduction throughout the float money or the patron’s funds held throughout the pooled account. This pool of funds generates earnings for the vendor—known as float earnings—which may be affected by the selection. This might finish in brokers charging elevated transaction costs to compensate for the loss in float earnings.

There is little doubt that this facility would help align the Indian secondary market shopping for and promoting with the worldwide most interesting practices, which could enhance the credibility of the Indian market. It would require a collaborative effort from all stakeholders to make it a actuality. Overall, ASBA might help to deepen and widen the investor base in India’s stock market, which is perhaps an enormous achievement in itself.

Note that the ASBA-like facility for secondary-market transactions shall be elective for merchants along with stock brokers. Sebi has permitted the broad framework for ASBA-like facility being made obtainable to merchants for secondary market shopping for and promoting, which is anticipated to lower working capital requirements for the members.

Arun Poddar is the chief govt, Choice International Ltd.

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April 19, 2023

Tag: Indian securities market

Of US fractional investing and the lesson for India

ASBA: A Game-Changer for Indian Investors