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Fractional shares refer to partial units of a full share in a company. Unlike standard equity trading, where shares are transacted in whole numbers, fractional shares represent a portion—less than one—of a full equity unit. In India, while the concept is gaining attention, the current depository and trading infrastructure does not support holding fractional shares in a demat account. This article explores how fractional shares are created, their significance, how they are handled under the Indian demat system, and what future regulatory developments may hold.
Fractional shares are parts of a full share, representing a percentage of one unit of stock. For instance, owning 0.5 of a share means you own 50% of one full share. These are typically not traded independently in regular stock markets, but can arise in several ways:
Corporate actions: Situations like mergers, acquisitions, bonus issues, or stock splits may lead to shareholders receiving shares in ratios that are not whole numbers.
Dividend reinvestment: Reinvesting dividends may not always purchase a full share, creating a residual fractional amount.
Automated investing plans: These may allocate specific rupee amounts that don’t always match whole share prices, resulting in fractional holdings.
India’s stock market and demat infrastructure are currently not designed to handle fractional shares as standalone tradeable units. Here’s how such situations are addressed:
Cash in lieu: When corporate actions result in fractional entitlements, companies usually credit shareholders with cash instead of fractional shares.
Pooling and auctioning: In some cases, the fractional shares are pooled, sold in the market as full shares, and the proceeds are distributed among eligible shareholders proportionately.
No trading allowed: Individual investors cannot buy or sell fractional shares on Indian exchanges or through registered brokers.
The two primary depositories in India—NSDL and CDSL—currently allow only whole shares to be held in demat accounts. This means that if you are entitled to 1.25 shares post-corporate action, 1 share goes into your demat account while the 0.25 is compensated through cash or pooled and sold.
Despite the current limitations in India, fractional shares are considered beneficial in several ways, especially in global markets:
Lower barrier to entry: Investors with limited capital can invest in high-priced stocks by purchasing smaller portions.
Improved diversification: Enables spreading investments across a wide range of securities without the need for large sums.
Customised investment amounts: Investors can allocate fixed amounts instead of buying based on share count, making budgeting more precise.
In countries like the US, platforms allow fractional trading of expensive stocks like Amazon or Tesla, making high-value equity participation more inclusive.
Currently, the Indian demat account system does not support the holding or trading of fractional shares. This is due to several operational and legal constraints:
Depository limitations: The backend systems of NSDL and CDSL are structured to register full shares only.
Broker limitations: Brokers in India do not act as market makers and cannot allocate or hold partial shares on behalf of clients.
SEBI regulations: There is no provision yet in Indian securities law to recognise fractional shares as tradable instruments.
As a result, fractional shares—if generated—are not credited into demat accounts but settled in cash or adjusted by pooling.
SEBI has initiated a regulatory sandbox programme that allows select entities to test innovative financial products under close supervision. One such project includes exploring tokenised versions of fractional shares. In this model:
Digital tokens represent fractional ownership in shares.
Platform-based tracking allows accumulation of tokens until they amount to one full share.
Conversion into demat happens once full share equivalents are collected.
While this pilot is still in an experimental stage, it hints at future possibilities of bringing fractional investing to India in a regulated and safe manner.
Although fractional shares are not directly held or traded in India, when such shares are compensated via cash:
Capital gains tax applies on the proceeds received, depending on the holding period of the original shares.
Tax treatment is based on whether the underlying shares are short-term or long-term assets.
Investors must keep records of the share allotment and the cash received for accurate reporting during income tax filing.
For fractional shares to be fully implemented in India, several operational hurdles need addressing:
Dividend distribution: Accurate proportional payment of dividends to fractional holders must be ensured.
Corporate actions: Handling bonus issues, rights issues, and splits involving fractional units adds administrative complexity.
System compatibility: Current trading platforms and depositories must upgrade their frameworks to support partial share allocation.
Ownership clarity: Legal clarity is needed around who owns the fractional units and how they are recorded.
Until these are resolved, fractional shares will continue to remain a non-standard part of the Indian equity market experience.
Fractional shares, while commonplace in global markets, remain largely unavailable to retail investors in India due to structural and regulatory limitations. For now, investors receive monetary compensation when fractional entitlements arise through corporate actions. However, SEBI’s regulatory sandbox could open doors to token-based fractional investing, potentially reshaping market participation in the coming years. Until such innovations are formally adopted, fractional shares will continue to be settled outside the demat ecosystem.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Fractional shares are portions of a stock that represent less than one full share, and they usually arise from corporate actions such as bonus issues, mergers, or from investment plans that allocate partial ownership.
Trading in fractional shares is not permitted in India, as stock exchanges and demat accounts only allow transactions in whole share units.
Fractional shares in India are typically settled either through a cash payout to the shareholder or by pooling the fractional units, selling them in the market, and distributing the proceeds proportionally.
Fractional shares cannot be stored in demat accounts in India, since depositories only allow whole shares to be credited to an investor’s account.
The Securities and Exchange Board of India (SEBI) is exploring fractional share investing through its regulatory sandbox framework, which could eventually result in formal guidelines or approval for such investments in the future.
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