Markets

Investors can now trade in fractional shares

Suresh P. Iyengar | | Updated on: Apr 17, 2022

Company law panel also moots issue of restricted stock units and stock appreciation rights

Investors’ dream of holding a fraction of highly-priced stocks such as MRF, Honeywell Automation and Page Industries will soon come true. The Company Law Committee formed by the Ministry of Corporate Affairs has recommended various measures, including the issuance of fractional shares, Restricted Stock Units and Stock Appreciation Rights, besides allowing companies to hold a shareholders meeting in a hybrid mode to boost ease of doing business and improve liquidity in the market.

The fractional share refers to a portion of a share less than one. It will enable retail investors to own a part of the highly-priced share at a fraction of the cost. The move to allow trade in fractional shares comes as 1.42 crore retail investors entered market in FY’21.

For instance, instead of spending close to ₹67,459 to buy one share of MRF, the highest priced share in India, an investor can invest just ₹100 or ₹1,000 to own a part of the company share.

The committee had clarified that fractional shares should involve the company’s fresh issue of them

Recently, the International Financial Services Centres Authority allowed trading in fractional shares of global stocks under its regulatory sandbox regime in India.

Anand Lakra, Partner, J Sagar Associates said that given the recent increase in retail shareholder participation in the public markets, the recommendation on fractional shares would enable retail shareholders to trade in shares hitherto were inaccessible.

“Since the Companies Act did not expressly regulate RSUs and SARs, it led to uncertainty on their ability to issue such instruments,” he added.

To link employees’ compensation to the company’s shares, the committee recommended the issuance of RSU and SARs. Under RSU, an employee will be entitled to the shares at the end of the vesting period, so long as the performance parameters are met.

On the other hand, SARs are deferred compensation tied to the company’s stock performance. They give employees the right to the monetary equivalent to the appreciation in the value of a specified number of shares over a fixed period.

The move to hold a shareholders’ meeting in a hybrid model will increase their participation and save on cost.

Vaibhav Kakkar, Partner (Corporate and Regulatory), Saraf & Partners said the recognition of RSUs and SARs clears the ambiguity that existed under current regulations. While SAR existed for listed companies under SEBI regulations, clarity for unlisted companies is a welcome move.

However, he said compliance with hybrid shareholders meetings will also mean that some existing activities that operated in a regulatory grey area would now need to be aligned with the new rules, and short-term compliance burden may crop up, he added.

Mohnish Wadhwa, CEO, CapDeck Advisors said the RSU and SAR are products largely used by startups today and making them tradeable will boost the startup ecosystem.

Published on April 17, 2022
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