Sebi Seeks Legal Recognition For Fractional Shares Under Companies Amendment Bill

The Securities and Exchange Board of India (Sebi) has approached the Ministry of Corporate Affairs (MCA) to include provisions allowing the issuance and holding of fractional shares in the proposed legislation. The move comes as fractional ownership remains outside the framework of the Companies Amendment Bill currently before Parliament.

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Fractional Shares Proposal

A fractional share represents less than one whole share of a company. Such holdings can emerge through corporate actions including mergers, bonus issues and rights issues.

A government source said fractional shares were left out of the Bill over concerns about the effect on minority shareholder rights. Since fractional shares would not carry voting rights under the proposed framework, their inclusion could alter the existing structure of shareholder participation.

The proposal to formally recognise fractional shares is not new. The Company Law Committee had recommended in 2022 that company law should accommodate certain forms of equity-linked ownership and compensation that were not specifically recognised or clearly covered under the Companies Act, 2013.

Companies Bill Covers Other Equity-Linked Instruments

The Companies Amendment Bill introduced in Parliament on March 23 provides for additional instruments linked to the value of share capital for executive compensation. These include Restricted Stock Units and Stock Appreciation Rights, alongside Employee Stock Option Plans.

Fractional shares, however, were not included in the version of the Bill introduced before Parliament.

The Bill was subsequently sent to a joint parliamentary committee for examination. The committee submitted its report on August 3 and proposed several changes to the legislation, but did not recommend adding provisions for fractional shares.

Company Law Committee Had Recommended Inclusion

The Company Law Committee had earlier proposed allowing the issuance, holding and transfer of fractional shares for specified classes of companies. Its recommendation also called for separate prescriptions for listed companies in consultation with Sebi.

The committee clarified that its proposal related to situations where a company makes a fresh issue of fractional shares. It did not cover temporary fractional holdings created as a result of corporate actions.

Fractional ownership is already permitted in markets including the United States, Canada and Japan. The mechanism allows investors to hold smaller portions of high-priced shares without having to purchase a complete unit.

As per reports, Ankit Singhi, Partner at Corporate Professionals, said fractional shares could improve market liquidity and widen the investment choices available to retail participants. He also noted that investor protection and financial education would need attention if such a system were introduced in India.

The latest proposal from Sebi puts fractional shares back into consideration as the government works on changes to company law. Any framework would need to address issuance, ownership, transfer and investor rights before the mechanism can be formally incorporated into the legislation.