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Business Standard

Mkt regulator Sebi opens door to fractional shares in innovation sandbox

The Securities and Exchange Board of India (Sebi) has approved a proposal from a startup to test fractional shares in its innovation sandbox, marking a potential shift in the Indian equity landscape. This represents a notable change in stance from 2021, when Sebi rejected a similar proposal in its regulatory sandbox, primarily due to concerns regarding the custody of fractional shares. Fractional shares allow investors to own or trade portions of a single share rather than being limited to whole units—a practice already popular in the United States. Earlier this month, Bengaluru-based Xaults joined Sebi's innovation sandbox to pilot fractional share trading. Co-founder Neeraj Singh stated that over the next three to four months, the company will demonstrate various use-cases to Sebi and other market participants. However, full-scale live testing will proceed only if Sebi shifts them to the regulatory sandbox. Singh emphasised that the crux of their successful application was a custody framework: fractional shares would be held at the depository rather than at the broker level. 'We will work together with the depository and enable it at the depository level. Ownership will still sit in the user's account or directly with the user. By enabling it at the depository, brokers will be able to offer fractionalised shares,' Singh explained. Xaults also plans to collaborate with clearing corporations to experiment with smart contract-based trade settlements. A specific depository will be assigned once Sebi moves them forward in the process. Sebi did not respond to emailed queries about fractional ownership as of press time. In January 2021, Zerodha and jointly sought approval for fractional share investments in Sebi's regulatory sandbox but were rejected. Their model relied on a holding entity buying full shares, then selling fractions through a registrar and transfer agent licensed by Sebi. A trustee would oversee fair treatment of fractional shareholders, but transfers could only occur to and from this holding entity—posing regulatory and structural challenges. Legal experts underline that Sebi's framework restricts brokers from holding shares as principals, complicating fractional share implementation. 'For fractional ownership to become feasible in India, the MCA must amend key provisions of the Companies Act, 2013—which currently allows only whole units. Amendments should permit issuance and transfer of fractional shares in dematerialised form, as recommended by the Company Law Committee in 2022,' said Manendra Singh, Partner at Economic Laws Practice. In 2023, the then Sebi Chairperson Madhabi Puri Buch expressed interest in enabling fractional ownership but highlighted the need for changes in both the Sebi Act and the Companies Act. 'Challenges also include ensuring compliance with KYC and AML regulations, managing corporate actions like bonus shares, and updating tax laws to clarify the treatment of fractional ownership—all of which require coordination between Sebi, the MCA and tax authorities,' Singh added.