The concept of fractional ownership of an investment property is that many investors come together and form a pool of money when one individual does not have the requisite ticket size due to the high price of the property. According to Investopedia, “Fractional ownership is an investment approach in which the cost of an asset is divided among different shareholders. All shareholders receive the benefits of the property, such as income sharing, reduced rates and usage rights”.
In India, the concept of fractional ownership is practiced in real estate. Fractional real estate (FRE) is an informal structure in which an entity involved in a real estate business or real estate services finds a group of investors, collects money through legal documents and invests in a property that would otherwise be owned by a single investor. would be ineffective for Reportedly, market regulator SEBI is working on issuing guidelines to regulate the FRE segment for the sake of investor protection.
If we go conceptually and not strictly technically, the fractional ownership concept is practiced in many other investment properties. For example, Global (US) stocks are listed on NSE IFSC at Gujarat International Finance Tec-City (GIFT). Select major global stocks are listed on the Indian exchanges – NSE and BSE – operating in GIFT City. The price of these shares in rupee terms will be higher due to currency conversion rate. The way it works is that you cannot buy stocks directly but buy an IFSC receipt, which is a negotiable financial instrument in the nature of a Depository Receipt (DR). US stock is the underlying asset, and the receipt represents partial ownership of a stock. For illustrative purposes, let’s say you have a positive outlook on Apple stock and want to take advantage of it. The stock price is, say, $170. at a conversion rate of 82 per dollar, Apple’s per share price would be approx. 14,000. The price of a DR with underlying Apple in NSE IFSC is, say, $6.71. at a conversion rate of 82, it will cost approx 550. So, with the DR, you’re buying about 4% of a stock of Apple, with proportionate gains in price appreciation, dividends, etc.
Mutual Fund (MF) schemes sell ownership units in a pool of investments. As an example, when you buy a unit of an exchange-traded fund (ETF) with Nifty or Sensex, you are actually buying a fraction of Nifty or Sensex. It provides benefits to small scale investors who do not have the ticket size to buy all the shares in Nifty or Sensex.
Non-fungible tokens (NFTs), which are not strictly investment assets as they are illiquid and non-regulated, operate on the concept of fractional ownership as the ownership of an asset is distributed among many people. Cryptocurrency exchanges – although it is debatable whether these are “exchanges” as it is not regulated by SEBI or any other authority – offer a small fraction of ownership in a cryptocurrency. Given that the concept is there in some form or the other, and it helps retail investors in terms of ticket size, it can be formalized and introduced into mainstream investments, i.e. stocks and bonds.
Indian equity stocks are at a higher price. An example would be MRF with a share price of approx. 1 Lac. Then, there are bonds with face value of 1 lakh or above. While mutual funds can help in buying such units at a cheaper cost, financial markets are evolving and new instruments are becoming available to investors. A financial services provider may offer fractional ownership in stocks and bonds by pooling money from many investors. However, it will be unofficial and available only to a limited number of investors. Rather, it should be offered as a product by the exchanges, that is, NSE and BSE, so that all investors can benefit from it.
How will it work? Exchanges will offer stocks or bonds priced above a threshold. The receipt will be available on the exchange representing a fraction of the ownership of the stock or bond. Trades on receivables will take place on the exchange platform, where the price movement will represent the movement in the underlying. The profit of dividend or interest will be distributed proportionately or will be built into the trade value of the receipt.
With the growing investor base in the country and increasing financialization of savings, there is a need to ‘retail’ the availability of investment opportunities.
Joydeep Sen is a Corporate Trainer and Author.
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