Sebi greenlights pilot for fractional shares via innovation sandbox: Report

Fractional shares, widely used in the United States, enable investors to purchase or trade a fraction of a single equity share instead of being restricted to full units.

The Securities and Exchange Board of India (Sebi) has granted a startup permission to explore fractional share trading within its innovation sandbox — a move that could reshape the Indian equity market, a Business Standard report said on Wednesday.

This heralds a key departure from the market regulator’s previous position in 2021, when a similar plan was rejected due to concerns surrounding the custody mechanism for fractional shares.

Fractional shares, widely used in the United States, enable investors to purchase or trade a fraction of a single equity share instead of being restricted to full units.

The BS report also said that Bengaluru-based fintech startup Xaults became part of Sebi’s sandbox earlier this month to test fractional share transactions. Co-founder Neeraj Singh stated that the company will demonstrate various use-cases to Sebi and other stakeholders over the coming three to four months. However, live testing at scale will only begin if Sebi formally admits the company into the regulatory sandbox.

Singh told Business Standard that the foundation of their approved proposal lies in the custody model — wherein fractional shares would be maintained at the depository level, not with brokers.

“We’re working closely with the depository to support custody at that level,” Singh said. “Ownership will remain with the user or within their account. With depository-level custody, brokers will be able to offer fractionalised shares,” he added.

The startup also plans to partner with clearing corporations to test smart contract-based trade settlement systems. Business Standard noted that a designated depository will be assigned once Sebi advances Xaults further into the process. At the time of reporting, Sebi had not responded to emailed questions regarding the structure of fractional ownership.

A previous proposal submitted in 2021 by Zerodha and StockHissa was declined by Sebi. According to Business Standard, that model relied on a holding entity purchasing full shares, which would then be split and transferred through a registrar and transfer agent licensed by Sebi. Though a trustee would oversee shareholder rights, the structure faced pushback due to regulatory constraints — primarily because it required all transfers to route through the holding entity. Experts have pointed out that Sebi’s regulations prevent brokers from acting as principals, creating hurdles for such models.

Legal professionals told Business Standard that legislative updates will be essential for fractional investing to take root in India. As Manindra Singh, a partner at Economic Laws Practice, explained, amendments to the Companies Act, 2013 are necessary, as the current law only allows full-unit ownership. The Company Law Committee recommended such reforms in 2022, advocating for the legalisation of fractional shares in dematerialised form.

In 2023, Sebi’s then-chairperson Madhabi Puri Buch had indicated interest in enabling fractional shareholding, but she also pointed to the need for updates across both Sebi’s and the Companies Act’s legal frameworks. As cited by Business Standard, Singh added that several challenges still remain, including KYC compliance, anti-money laundering protocols, handling of corporate actions like bonus shares, and tax law adjustments — all of which will require tight coordination between Sebi, the Ministry of Corporate Affairs, and tax authorities.