Issuance of Fract / ional Shares

Fractional shares have been anathema to the Indian markets but before we explore the topic– what is a fractional share? A fractional share refers to a unit of stock that is less than one full share. Subscription to fractional shares allows investors an opportunity to hold a spilt share of a single share of a company, where price per share may be exorbitant. Fractional shares can also be generated in case where there is a change in the capital structure of a company.

The recent Company Law Committee Report dated March 21, 2022, recommended that the existing provisions of the CA be amended to allow for issuance, holding and transfer of the fractional shares, especially due to the increased participation of retail investors in the market, who may not have the purchasing power to buy a whole share due to the high price of a single unit. The Company Law Committee Report clarified that its recommendation related to fresh issue of fractional shares and not to fractional shares arising out as a result of any corporate action. The Company Law Committee Report also mentioned that prescriptions for the issuance, holding and transfer of fractional shares by a listed company would be made after consulting the Securities Exchange Board of India (“SEBI”).

Current law in India

Subscription to a fractional share is not permissible in India, as given under Section 4(1)(e)(i) of the Companies Act, 2013 (the “CA”), which provides that the memorandum of association shall state that “the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe, which shall not be less than one share”. Accordingly, Table F – Schedule I of the CA also provides restrictions to hold fractional shares.

We came across this interesting case relating to fractional shares: In M/s. Simpson and Company Limited [1] , the applicant/petitioner company filed a petition before Hon’ble National Company Law Tribunal (“Tribunal”), Chennai, for consolidation of shares as per S. 61(1)(b) of the CA. In the applicant company’s board meeting, the consolidation of share into shares of larger face value and cancelling fractional shares arising out of such consolidation in accordance with S.66 of the CA was taken up. The board had determined that in pursuance of such cancellation, the respective holders of fractional shares shall be paid as per value determined by an independent valuer. The holders of such fractional share were not satisfied with the valuation arrived at for the price per share and objected to the resolution of the company board on the valuation of the fractional shares. When the matter was heard by the Tribunal, with the purview to safeguard the interest of dissenting and fractional shareholders, the Tribunal directed the applicant company to create a trust for the transfer of all such fractional shares for the beneficial interest such as regular dividends and appreciation in the market price.

The law elsewhere

The basic notion behind the issuance of fresh fractional shares to investors is because it allows investors to own shares of financially sound corporations. Countries like Canada, USA, Japan and UK allows traders to trade in fractional shares. On March 03, 2022, NSE IFSC Limited (a wholly owned subsidiary of National Stock Exchange of India Limited) launched trading in select US stocks wherein investors were provided with an option to trade in fractional quantity/value when compared to the underlying shares traded in US markets.

Conclusion

It is no secret that Indians are quite interested in trading in stocks. As is also evident from a recent study examined by Google Trends India was the second most stock obsessed country in the world. As the contours of the Indian markets are changing, maybe it is opportune moment to consider the recommendation of the Company Law Committee Report. The jury is still out on this one.

[1] CP/1409/2019