SEBI Launches Innovation Sandbox for Fractional Share Proposals

The Securities and Exchange Board of India (SEBI) has permitted Bengaluru-based startup Xaults to test fractional share trading in its innovation sandbox, as per news reports. This comes after a previous rejection of a similar proposal in 2021, primarily due to concerns over how fractional shares would be held.

What Does Fractional Shares Mean

Fractional shares let users buy or trade part of a stock rather than a full share. While this model is common in the US, it hasn’t been allowed in Indian markets due to regulatory and structural restrictions.

Structure of the New Pilot

Xaults will work with depositories to keep fractional shares at the depository level, not with brokers. The startup will also coordinate with clearing corporations. A specific depository will be assigned if SEBI moves the firm from the innovation sandbox to the regulatory sandbox.

The company plans to run pilot demonstrations for three to four months. Live transactions and full-scale testing will only happen after SEBI’s approval to move to the next phase.

Previous Rejections and Legal Gaps

In 2021, Zerodha and StockHissa jointly proposed a structure using a holding entity to distribute share fractions. SEBI rejected it due to issues with transfers, ownership rights, and broker restrictions under current rules.

As per news reports, the Companies Act, 2013, currently recognises only whole shares. Amendments will be required to enable fractional ownership in demat form. The Company Law Committee recommended such changes in 2022.

Former SEBI chairperson Madhabi Puri Buch had pointed out in 2023 that changes to the SEBI Act, Companies Act, and tax regulations are needed. Issues like corporate actions, KYC compliance, and taxation will also require clarity.

Read More: SEBI Tweaks Derivatives Trading Rules for Easing Investments for NRIs!

Conclusion

SEBI’s move to allow testing of fractional shares is a first step. Implementation will depend on multiple legal and policy changes across regulatory bodies.

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