Retail investors with limited capital often find it difficult to buy high-quality, high-priced stocks, even when they believe in the company’s strong fundamentals. Instead, many end up investing in low-cost or penny stocks, thinking they are getting more shares for their money, even if those stocks lack reliability.
Now, SEBI is exploring a major shift in the Indian stock market called ‘fractional share trading’. This concept allows investors to buy a small portion of a high-priced share, like MRF, without paying the full price of one whole share.
Let’s understand this new development and why it could open big doors for Indian investors.
What’s Happening?
SEBI has allowed a Bengaluru-based fintech startup, Xaults, to test fractional share trading within its innovation sandbox. This marks a significant departure from SEBI’s earlier stance in 2021, when similar proposals were rejected due to concerns about how shares would be held.
In the new model, fractional shares are held at the depository level rather than with brokers. This means investors will directly own the shares in their Demat accounts, just in smaller units.
Xaults is also working with clearing corporations to test smart contract-based trade settlements. A designated depository will be appointed later, once SEBI progresses with the project.
What is Fractional Ownership?
Fractional ownership means holding a small portion of a stock instead of buying a whole share. For example, if one share of Page Industries costs Rs 48,800 and you only have Rs 500 to invest, you could still buy 1/100th of that share through Xaults.
These small pieces are called tokens and are stored securely on a blockchain. Each token represents legal ownership of a fraction of the actual share.
What is Xaults and How Does It Work?
Xaults is a Bengaluru-based fintech startup working to make stock market investing more affordable and accessible. It enables investors to buy fractions of expensive stocks, such as MRF or Page Industries, by converting them into blockchain-based digital tokens.
These tokens represent real, fractional ownership and can be traded independently under names like ‘MRF-T’ for tokenised MRF shares. If an investor collects enough tokens to make up one full share, they can convert them back into a whole share and receive it in their Demat account.
Investors can trade, hold, or convert these tokens based on their needs. Xaults is also partnering with brokers and depositories to ensure the system is fully secure and integrated.
How is Xaults Different from Mutual Funds and Smallcase?
Unlike mutual funds, with Xaults, investors don’t just gain price exposure, they hold actual shares, just in smaller parts. If they collect enough, they can convert them into full shares.
While the US has offered fractional shares for years, India has faced regulatory and legal roadblocks. A 2021 proposal by Zerodha and StockHissa was rejected by SEBI because it relied on a holding company model to divide shares, something SEBI couldn’t permit under existing laws.
India’s Companies Act, 2013 currently allows only full-unit ownership. In 2022, the Company Law Committee recommended legal amendments to permit fractional shares in Demat form, but the changes are still pending.
Other key challenges include ensuring KYC and anti-money laundering (AML) compliance, proper handling of dividends and bonus shares and updates in tax rules. All of these require coordination between SEBI, the Ministry of Corporate Affairs, and tax authorities.
What Does This Mean for Investors?
If approved, fractional equity investing can significantly improve access to the stock market for small investors. Instead of waiting to save up for high-priced stocks like MRF or Page Industries, investors could start small and still own a share.
It would also enable better diversification, as investors could spread small amounts across multiple quality stocks, not just a select few. Additionally, tokenised shares may improve liquidity and flexibility.
Overall, this could open up new avenues for retail investors and make long-term wealth creation more inclusive.
What’s Next?
Though fractional shares are not yet live in India’s equity markets, the concept is already working in real estate through REITs (Real Estate Investment Trusts) and India’s growing $500 million fractional real estate market. There, investors can own parts of commercial properties and earn rental income. Fractional equity investing could take a similar route, boosting stock market participation and liquidity.
Xaults plans to demonstrate its model in the coming months. If SEBI finds it feasible, live testing may begin soon. But for broader adoption, India will need clear, updated regulations.
*The companies mentioned in the article are for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
