The government is considering a host of steps to boost the participation of retail investors in equity markets and enhance the use of employee stock options (ESOPs). According to official sources, the Corporate Laws (Amendments) Bill, to be tabled in Parliament in the Winter Session, will seek to amend the Companies Act to give legal sanction to transfer, issuance and holding of “fractional shares.” Also on the cards is automatic recognition to non-monetary employee benefit schemes like restricted stock units (RSUs) and stock appreciation rights (SARs).
Fractional shares are shares split into smaller units. They can make high-value stocks accessible to small investors, without leaving any uninvested cash. Such shares are also often an offshoot of stock splits, issuance of bonus shares and mergers and acquisitions (M&As).
At present, holding of fractional shares is not expressly permitted under the Companies Act but some companies do issue such shares. As per brokerage firm Zerodha, since domestic brokers can only act as agents of clients and not the principal, they can’t offer fractional investing.
The Bill will propose provisions in the Companies Act to enable holding and fresh issuances of fractional shares in certain classes of companies. For listed companies, similar modifications are likely to be made in consultation with the markets regulator Securities and Exchange Board of India (Sebi), an official told FE.
Legalising Fractional Shares to Lower Entry Barriers
Currently, even when fractional shares are created, the shareholders don’t usually hold them. Instead, a trustee appointed by the issuing company’s board, holds these shares and sells them at an appropriate time in the market. The proceeds from such sales are then distributed in proportion of the entitlement. “Since fractional shares are already being created, the government felt that it’s appropriate to legalise them,” said the official.
Experts said that the move will lower entry barriers for retail investors and bring India’s company-law framework closer to that of mature markets.
“From a legal standpoint, clarity will be key, particularly around treatment of fractional rights, and applicability across classes of companies. It can unlock wider retail capital participation and foster a more inclusive equity market structure,” said Kalpit Khandelwal, partner at Aekom Legal.
Individual investors, through direct holdings and via mutual funds, own nearly a fifth of the market now, the highest level in over two decades. Retail investors also account for more than half of daily trades on both the NSE and BSE.
GIFT City already permits the trading of fractional shares through the NSE IFSC exchange. Jurisdictions like the US, Japan and Canada allow holding and trading of fractional shares.
Streamlining Employee Benefits
Currently, SARs are recognised under the Sebi regulations but they can only be issued to the employees after shareholders approve a special resolution at the general meeting. In the case of RSUs, there are no regulations.
“In order to plug the regulatory gap, and to bring these schemes at par with the more popular schemes like ESOPs (employees’ stock options) and sweat equity shares, the government is likely to introduce enabling provisions in the Companies Act,” the official said.
To be sure, SARs are a form of equity compensation that allow employees to receive payment equal to a rise in the company’s stock price without actually purchasing the stock. RSUs are also a reward tool under which a company commits to give a specific number of shares to employees at the end of the vesting period, subject to certain conditions like meeting of performance parameters, duration of employment, etc.