FRACTIONAL SHARE INVESTING: IS INDIA READY FOR IT?

Abstract:

Fractional share investing has become increasingly popular in recent years, with many retail investors seeing it as an accessible way to diversify their portfolios and invest in high-priced stocks. However, the legality of fractional share investing in India is currently unclear, with no clear guidelines or regulations in place. This paper examines the potential benefits and risks of allowing fractional share investing in India, including its potential impact on retail investors, the stock market, and the economy as a whole.

Introduction:

Fractional share investing refers to buying or selling a fraction of a stock rather than a whole share. This has become more accessible in recent years due to the rise of online trading platforms and the growth of exchange-traded funds (ETFs) and mutual funds that allow fractional share purchases[1].

The potential benefits of fractional share investing include making investing more accessible to retail investors, increasing liquidity in the stock market, and diversifying investor portfolios. However, it also carries certain risks, including a potential reduction in shareholder voting power and increased market volatility.

Any decision to allow fractional share investing should be carefully weighed and considered in the context of the market and regulatory environment. Clear guidelines and regulations should be implemented to ensure that it is carried out fairly and transparently.Top of Form

Keywords:

Fractional share investing, ETFs, liquidity, market volatility.

Fractional Share Investing: A Comparative study

Fractional share investing has become increasingly popular around the world in recent years, providing an opportunity for investors to purchase fractions of shares of a stock, rather than having to buy a whole share. This development has been particularly welcomed by smaller investors who may have found the cost of purchasing full shares prohibitive.

The United States has been a leader in the development of fractional share investing, with online trading platforms like Robinhood and Square offering fractional shares to investors since 2015. This trend has continued to grow, and now many brokerages and investment apps allow investors to buy fractional shares of stocks, including Apple, Amazon, and Tesla, making the stock market more accessible to small investors.

Similarly, fractional share investing in Canada is on the rise, with platforms like Wealthsimple[2], which allow investors to purchase fractional shares of ETFs and individual stocks, gaining popularity. These platforms have made it easier for retail investors to invest in the stock market, giving them access to stocks they would have found difficult to buy.

In Australia, the use of fractional share investing has been rising, with platforms like Stake and Raiz making it easier for retail investors to purchase fractional shares of US and Australian stocks. These platforms provide an accessible and affordable entry point into the stock market, particularly for those who would like to invest small amounts of money.

The United Kingdom has also seen fractional share investing become popular in recent years, with platforms such as Freetrade and Trading 212 offering fractional share purchases of both UK and US stocks. These platforms have also made investing in the stock market more accessible to a broader range of investors.

Despite the popularity of fractional share investing in many countries, India has not yet allowed it. One of the reasons for this is the lack of clarity in the regulations governing fractional share investing in India. The Securities and Exchange Board of India (SEBI) has not yet issued any specific guidelines or regulations on fractional share investing, which has led to uncertainty among investors and brokerages[3].

Another reason for the absence of fractional share investing in India is the traditional approach to investing in the country. Historically, most Indian investors have preferred to invest in real estate, gold, and fixed deposits, and the stock market has been viewed as a riskier and less accessible option. However, with the rise of technology and the growth of online trading platforms, there has been a shift towards a more open and accessible approach to investing.

In conclusion, fractional share investing has become popular in many countries worldwide, providing an accessible and affordable entry point into the stock market for smaller investors. Despite its popularity in other countries, India has not yet allowed it, due to the lack of clarity in regulations and a traditional approach to investing. However, as the Indian market continues to evolve, it is possible that fractional share investing may become more prevalent in the future, providing an opportunity for a wider range of investors to invest in the stock market.

Benefits of Fractional Share Investing[4]:

Fractional share investing has several potential benefits for investors, particularly those who may not have the funds to purchase a full share of high-priced stocks. Some of the benefits of fractional share investing include the following:

1. Greater accessibility: Fractional share investing can make investing more accessible to retail investors who may not have the funds to purchase a full share of expensive stocks. This allows investors to participate in the stock market with smaller amounts of capital, thus diversifying their portfolios with a wider range of assets.
2. Diversification: Fractional share investing also allows investors to diversify their portfolios with a wider range of assets, including high-priced stocks that were previously out of reach. This reduces the risk of having all investments concentrated in a single stock, sector, or asset class.
3. Increased liquidity: Fractional share investing could lead to increased liquidity in the stock market, with more frequent trades and smaller bid-ask spreads. This ultimately benefits all market participants, including retail investors, institutional investors, and issuers of securities.
4. Low transaction costs: Fractional share investing can also have lower transaction costs as investors can purchase small fractions of a stock without having to pay the full price for a whole share.

Real-life examples of fractional share investing can be seen in several popular investment platforms like Robinhood, Acorns, and Stash, allowing investors to purchase fractional stocks and ETFs with small amounts of capital. For instance, an investor with only $10 can buy a fraction of a share in a high-priced stock like Amazon or Tesla.

Another example is in the realm of retirement savings, where several robo-advisors, such as Betterment and Wealthfront, allow investors to buy fractional shares of ETFs and mutual funds in their IRA accounts. This provides access to low-cost, diversified investment options, helping investors build a retirement portfolio to help them reach their long-term financial goals[5].

Risks of Fractional Share Investing:

Fractional share investing can offer many benefits, but it also comes with its own set of risks. Here are some potential risks of fractional share investing, along with examples and legal cases:

1. Market risk: Fractional share investing is subject to the same market risks as regular stock investing. The value of the shares you own can go up or down based on market conditions, and there is always the risk of losing money.
2. Lack of control: When you invest in fractional shares, you may have less control over the investment than you would with a whole share. For example, you may need help to vote on corporate matters or participate in shareholder meetings.
3. Technical issues: Fractional share investing platforms may experience technical problems, such as outages or other disruptions, which could prevent you from buying or selling shares.
4. Legal and regulatory risks: Fractional share investing platforms are subject to regulation, and there is always the risk that the forum may not comply with all applicable laws and regulations. In some cases, this can lead to legal action against the platform.

One example of a legal case related to fractional share investing is the lawsuit filed against Robinhood in 2021. The Securities and Exchange Commission (SEC) accused Robinhood of providing false and misleading information to its customers about its revenue sources, among other things.

Another example is the case of Yieldstreet, a platform that allowed investors to purchase fractional shares in loans made to small businesses. In 2020, the Securities and Exchange Commission (SEC) charged Yieldstreet with securities fraud, alleging that the company made false and misleading statements to investors about the risks and returns of its investments.

Does India need Fractional Share Investing?

In India, fractional share investing is a concept that has recently gained attention. While mutual funds and ETFs are the preferred investment vehicles for retail investors in India, fractional investing allows younger and newer investors to get a taste of the markets with smaller amounts. This can be especially appealing to those who are just starting and may need more capital to invest.

One use case for fractional share investing is direct indexing. Direct indexing is buying all the individual stocks in an index with the same weights. The advantage of direct indexing is that it allows investors to use broad indices like the Nifty 100 as a starting point and customize them to their specific preferences. For example, if someone wants to own Nifty 100 minus TCS because they have TCS ESOPs, they can do so with direct indexing. It also allows advisors and investors to apply ESG strategies on the Nifty 100 by screening out stocks like sin stocks, oil & gas stocks based on their values[6].

Smallcase, with whom Rainmatter[7] has partnered, has been allowing direct indexing since 2017, before it became a thing in the US. With smallcase, investors can build their own customized portfolio and invest in as little as 1 share. However, investors still need a few thousand rupees to buy a smallcase, which can be reduced using fractional shares.

While the requirement for fractional investing in India may be lower than that of the US on an absolute basis, with just about 17 companies having a market price >Rs. 10,000 and about 300+ companies at a market price >Rs. 1000, the requirement of having such an ecosystem in place may appear sooner than later. It can be argued that fractional investing is an important step for democratizing investment opportunities in India, allowing retail investors to invest in a diversified range of stocks with smaller amounts.

However, offering fractional investing is not currently possible in India due to complex regulatory requirements. In India, brokers can only act as agents of clients and not the principal. Brokers simply collect orders and send them to the exchanges. Once an order is executed, the shares are held in the name of the clients in a demat account with a depository like CDSL and NSDL. Therefore, significant regulatory changes would be required for fractional investing to be made possible in India.

Conclusion:

In conclusion, the article “Fractional Share Investing: Is India ready for it?” has shed light on the potential benefits and risks of fractional share investing in India, and compared it to its popularity in other countries. The article compares fractional share investing in India to countries like the United States, Canada, Australia, and the United Kingdom, where it has become increasingly popular in recent years. While fractional share investing has the potential to provide greater accessibility, diversification, liquidity, and cost savings, it also comes with risks such as a potential reduction in shareholder voting power and increased market volatility. To ensure fair and transparent implementation, it is crucial for clear guidelines and regulations to be established. India’s traditional approach to investing and lack of regulatory clarity has hindered the adoption of fractional share investing thus far. However, with the continuous evolution of the market, it is possible that fractional share investing may become more prevalent in the future[8].

Submitted By: Kunal Gupta, 3^rd year B.A. LLB, Symbiosis Law School, NOIDA

[1] Benjamin Curry, How do Fractional Shares work? – Forbes Advisor, 2022.

^[2] Katherine Gustafson,Everything You Need to Know About Fractional Shares, Wealthsimple.

[3] Securities and Exchange Board of India (SEBI) Guidelines.

[4] CNBC. “Fractional Shares: The Pros and Cons of Investing in Slices of Stocks and ETFs.” https://www.cnbc.com/2020/06/05/fractional-shares-the-pros-and-cons-of-investing-in-slices-of-stocks-and-etfs.html

[5] Ibid.

^[6] Ajit Kidambi, Should India Allow Fractional Share Investing?, India CorpLaw.

[7] Fractional Share Investing in United States – Rainmatter.

[8] Is fractional share investing possible in India? – Rainmatter & Zerodha, India.