Can you invest in high-value stocks without burning a hole in your pocket?

In India, many retail investors aspire to invest in high-value shares of companies like MRF, Page Industries, Honeywell Automation India, Shree Cement, Abbott India, and Nestle India. However, buying a whole share, especially of companies like MRF, currently trading around Rs 1,08,500, is too expensive for most. To solve this problem and make investing fair and accessible, the Securities and Exchange Board of India (SEBI) is considering introducing fractional ownership of shares in India, where you can buy a slice of a share instead of the whole thing.  

Typically, fractional shares would allow investors to purchase portions of a full share that are high-value stocks without having to pay the huge price tag. The move could not only entice more people to invest in the markets but will also give retail investors access to high-value shares while giving a fillip to market liquidity and diversifying company ownership

 If permitted in India, the move will allow retail investors to invest even in those companies where the share price is very high and owning even a single unit takes a considerable amount.

A single share of MRF is priced at approximately Rs 1.09 lakh, which means that anyone looking to acquire a share must invest more than Rs 1 lakh. If fractional ownership is permitted, one could invest, for instance, Rs 25,000 and acquire a quarter or even smaller fractions of a share.

"Fractional share ownership enables retail investors to purchase a portion of a company's stock with predetermined budgeted amounts. For example, an investor could invest Rs 25,000 and obtain one-fourth or even smaller fractions of a high-priced share, making it accessible and affordable. This change would allow investors to diversify their portfolios and participate in companies they previously found financially out of reach," said Shruti Jain, Chief Strategy Officer, Arihant Capital Market Ltd.

"For example, if the price of a share is Rs 1 lakh, without fractional ownership, a retail investor can own only 1 unit of that share even after spending a large part of her equity portfolio. If the same share is available in 100 fractions (where each unit represents 1% ownership of the underlying stock), the investor can choose to own ten fractional units for Rs 10,000. She can allocate the remaining amount to other stocks to ensure adequate diversification," said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

A retail investor might want to invest only Rs 10,000. At current prices, he would barely be able to buy a single share each of Reliance Industries, TCS, Kotak and HDFC Bank. An extreme case in point is MRF Limited, whose shares are trading at Rs. 1.07 lakhs apiece!  "In order to diversify effectively, the same investor may be tempted to invest in speculative stocks simply because they are lower priced, or even buy penny stocks. Fractional ownership would enable the same investor to gain exposure to a much larger number of blue chip shares across sectors and market capitalizations," said  Mayank Bhatnagar, COO, FinEdge.

If allowed, the move is a win for companies as they can avoid a  stock split. For example, if one share is priced at Rs 10,000, the company might choose to split it into 10 shares. And then each share will only be worth Rs 1,000. A company elects to perform a stock split to intentionally lower the price of a single share, making the company's stock more affordable without losing value. Most investors are more comfortable purchasing, say, 100 shares of a Rs 100 stock as opposed to 1 share of a Rs 10,000 stock. So when the share price has risen substantially, many public companies end up declaring a stock split to reduce it. Although the number of shares outstanding increases in a stock split, the total rupee value of the shares remains the same compared with pre-split amounts.

Several US-based platforms have already facilitated fractional share trading, allowing investors to invest in renowned companies like Apple without the need for significant capital. Extending this opportunity to Indian companies can help retail investors make greater and diversified choices.  

"Fractional investing makes sense in the US because there are a lot of stocks with higher prices. ..In India, there are just about 17 companies that have a market price >Rs. 10,000 & about 300+ companies at market price >Rs. 1000. While the requirement may be lower than that of the US on an absolute basis while comparing the per capita income of the US at $52,000 vs India being at $2,000, the requirement of having such an ecosystem in place may appear sooner than later," according to Somnath Mukherjee Business/Legal at Zerodha.

Currently in India, the concept of fractional ownership is practised in real estate wherein an entity involved in real estate business or real estate services gets a set of investors together, pools the money and invests in a property that otherwise would have been unaffordable for one investor.

Initially, India's regulatory framework imposed limitations on holding fractional shares. However, the Company Law Committee (CLC), formed by the Ministry of Corporate Affairs (MCA) in 2019, has recommended amending CA-13 to facilitate the issuance, holding, and trading of fractional shares by businesses in India. And last month, Sebi chairperson Madhabi Puri Buch, while speaking at the Global Fintech Forum in Mumbai, said that fractional ownership is something that the capital market watchdog is keen to do but it requires changes in the Sebi Act and also the Companies Act. 

"To promote the growth of fractional ownership in India, a clear and tailored regulatory framework is essential to address the unique challenges of fractional ownership while ensuring investor protection and market integrity.Brokerage firms should adapt their practices, through collaborations with depositories and innovative technologies. Exploring mandatory proxy voting rights for fractional shareholders can enhance their participation in corporate decisions," according to Arun Poddar,  CEO, Choice International.