Big equity boost coming for retail investors, employees

Government to Lower Entry Barriers for Retail Investors, Enhance Employee Stock Options

The Indian government is considering several steps to boost participation of retail investors in equity markets and promote the use of employee stock options (ESOPs). The Corporate Laws (Amendments) Bill, set to be tabled in Parliament during the Winter Session, aims to amend the Companies Act to allow legal transfers, issuances, and holdings of "fractional shares."

Fractional Shares to Make High-Value Stocks Accessible

• Fractional shares are shares split into smaller units, making high-value stocks more accessible to small investors.
• They are often an offshoot of stock splits, issuance of bonus shares, and mergers and acquisitions (M&As).
• Currently, holding of fractional shares is not expressly permitted under the Companies Act, but some companies do issue such shares.
• Brokers, like Zerodha, can't offer fractional investing due to regulatory restrictions.

Legalising Fractional Shares

The proposed Bill will introduce 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 Securities and Exchange Board of India (Sebi).
• 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.

Experts Welcome the Move

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.

Streamlining Employee Benefits

The government is also considering introducing enabling provisions in the Companies Act to plug the regulatory gap and bring employee benefit schemes like restricted stock units (RSUs) and stock appreciation rights (SARs) at par with ESOPs.

• 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 a reward tool under which a company commits to give a specific number of shares to employees at the end of the vesting period.

Current Scenario

Currently, individual investors own nearly a fifth of the market now, the highest level in over two decades. Retail investors account for more than half of daily trades on both the NSE and BSE.

International Jurisdictions

Jurisdictions like the US, Japan, and Canada already allow holding and trading of fractional shares. GIFT City also permits the trading of fractional shares through the NSE IFSC exchange.