The Securities and Exchange Board of India (Sebi) has asked the Ministry of Corporate Affairs (MCA) to recognise the issuance and holding of fractional shares in the Companies Amendment Bill, according to official sources. A fractional share refers to a portion of a share less than one share unit, which may arise from corporate actions like mergers, bonus issues, or rights issues. As reported by Business Standard, this proposal would widen investment options for retail investors by increasing market liquidity and better price discovery. The proposal has been previously discussed, with the Company Law Committee, in its 2022 report, recommending allowing companies to issue, hold and transfer fractional shares for certain classes of companies. For listed entities, it suggested that the framework could be prescribed in consultation with SEBI.
The DHFL fraud case involving ₹34,615 crore in alleged fund diversion serves as a stark reminder of the vulnerabilities in India's financial system. According to investigations, the fraud involved Bandra Book Entities (BBEs) - shell companies controlled by promoters that took ₹11,548.95 crore in fake loans between FY06-19. The scheme involved creating thousands of fictitious home-loan accounts within DHFL's accounting system, with loans appearing as ordinary retail lending while money moved towards promoter-linked entities. The case demonstrates how complex financial structures can mask fund diversion, with money moving through multiple layers of connected entities before reaching ultimate beneficiaries. This fraud highlights the critical need for enhanced transparency and investor protection mechanisms in India's financial markets.
Issuance of fractional shares will increase market liquidity, leading to better price discovery. This would give retail investors a much wider pool of options, said Ankit Singhi, partner at Corporate Professionals, as reported by Business Standard. Market experts believe allowing fractional ownership could improve liquidity and broaden investment opportunities for smaller investors. Investors with limited capital would be able to gain exposure to expensive stocks without purchasing an entire share. However, experts noted that in the Indian context, we need a better system for investor protection and education if we plan to introduce fractional shares. The DHFL fraud case underscores the importance of such safeguards, as it demonstrates how complex financial structures can mask fund diversion and create systemic risks for investors.
Countries such as Canada, Japan and the United States already permit fractional share ownership, according to Business Standard. The Company Law Committee stated that the issuance, holding and transfer of fractional shares should be enabled for classes of companies, with prescriptions made in consultation with Sebi for listed companies. Experts argue that any framework would need strong investor-protection measures and greater financial awareness to ensure fractional investing develops safely in India. The current legislative process suggests that while regulatory support exists, implementation may require additional safeguards and stakeholder consultations before fractional share recognition becomes a reality. The DHFL fraud case provides crucial context for these discussions, as it demonstrates the importance of robust financial systems and transparency measures in preventing such fraudulent activities.
