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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