Fractional Share Trading : A New Initiative in Malaysia?

On 7 September 2023, the Securities Commission Malaysia issued the revised Guidelines on Market Conduct and Business Practices for Stockbroking Companies and Licensed Representatives (“Revised SBC Guidelines”) which came into effect immediately upon issuance.
 
The amendments in the Revised SBC Guidelines set out the requirements that would allow a Participating Organisation (“stockbroking company”) to provide and implement fractional share trading services for shares listed on Bursa Malaysia Securities Berhad (“Bursa Malaysia”).
 
Fractional share trading is one of the capital market initiatives announced by the Prime Minister of Malaysia, Dato' Seri Anwar bin Ibrahim, at the launch of the Madani Economy: Rakyat Empowerment Framework (“Madani Framework”) on 27 July 2023. The initiative seeks to make investing in shares listed on Bursa Malaysia more affordable by reducing trading lot sizes.1
 
According to the SC’s media release announcing the issuance of the Revised SBC Guidelines, “A fractional share is a portion of a stock that is less than one standard board lot”. According to Bursa Malaysia’s Participating Organisations’ Trading Manual (MKT/SBT/PO/032)2 (“the Trading Manual”), a normal board lot is 100 shares.3
 
A new Section 9B has been introduced into the Revised SBC Guidelines to set out the requirements that a stockbroking company must comply with in order to provide fractional share trading service for shares listed on Bursa Malaysia. The requirements include the following: 
  1. a stockbroking company that intends to provide fractional share trading service must notify the SC in writing at least 14 days prior to the commencement of such service; 

  2. the stockbroking company must: 
  • disclose to its customers the procedures on order execution and cancellation and ensure they are applied fairly to all its customers; 

  • have in place mechanisms to help ensure the resiliency, reliability and integrity of the system used in relation the fractional share trading service; 

  • ensure there is no matching4 of a customer’s buy or sell order with another customer’s order; 

  • put in place adequate system to ensure price transparency with reference to the bid or ask price of the listed shares; 

  • execute all customers’ orders for listed shares at the prevailing market price; 

  • ensure price transparency and customers’ orders are executed at the prevailing market price including through regular monitoring on price display; 

  • provide clear and adequate disclosures to the customers relating to fractional share trading service including the fees payable, entitlement to participate in corporate actions, dividend payment, voting rights and others; and 

  • ensure there are adequate policies and procedures for proper supervision of the fractional share trading service and trades undertaken. 
The Revised SBC Guidelines further provide that, notwithstanding the foregoing, the SC may at any time, where it deems necessary, impose any terms and conditions on the stockbroking company in relation to the fractional share trading service.
 
Comments
 
The statement by the SC that a fractional share refers to “a portion of a stock that is less than one standard board lot” raises an interesting question – do the Revised SBC Guidelines apply only to one or more whole share(s) which is/are less than one board lot of 100 shares, or do they also apply to a part or a portion of a single share, or to both?
 
If the Revised SBC Guidelines apply only to whole shares which are less than a board lot of shares, the question arises as to whether there are any compelling reasons to introduce this initiative as Bursa Malaysia already has an established framework for trading in odd lots of shares with rules and safeguards clearly set out in the Trading Manual.
 
The situation will be groundbreaking and will raise many interesting legal and procedural questions if the Revised SBC Guidelines are also intended to apply to trading of a part or a portion of a single share.5 In such event, will Bursa Malaysia introduce a framework for trading of a part or a portion of a single share? If not, then such trades will be off-market transactions that are governed by one or more private contracts between the buyer, seller and the stockbroking company. Significant issues that have to be addressed would include: (a) transparency and fairness of price finding mechanism; (b) payment and settlement procedures applicable to the transaction; and (c) the nature of the rights of a holder of a fraction of a share, in particular whether such holder has the right to attend and vote at company meetings, to subscribe for entitlements under a rights issue or to participate in a dividend reinvestment scheme, given that not every holder of a fractional interest in a single share may wish to subscribe for their respective entitlement.
 
Alert by Kok Chee Kheong (Partner) and Phua Pao Yii (Partner) of the Corporate Practice of Skrine.
 
 

1 See paragraph 38 of the Prime Minister’s Speech at the launch of the Madani Framework. Our article on the Madani Framework can be accessed here.
2 On 8 September 2023, Bursa Malaysia issued a revised Participating Organisations’ Trading Manual (MKT/SBT/PO/033) in relation to amendments which are to take effect on 2 October 2023. The provisions in the Trading Manual relating to odd lots are not affected by these amendments.
3 See paragraph 2.2 of the Trading Manual.
4 “Matching” is a form of market manipulation where a party offers to buy or sell securities with the knowledge that a matching order on the opposite side has been or will be entered.
5 Although the New York Stock Exchange and NASDAQ do not accept trades for a fractional share of stock, certain brokerages in the United States allow an investor to purchase part of a share that is owned by the brokerage. For more information, please click here.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.