Can A Minor Apply For An IPO?

Lately, the Indian stock market has seen a record number of new retail investors, and the same is true for several of the recent IPO launches. Investing in an Initial Public Offering or IPO is a popular way to acquire shares of a company during its debut on the stock market. Many investors apply for IPOs to capitalise on growth opportunities and achieve long-term wealth. But what about minors? Can minors invest in IPOs, and if so, how does it work? Let’s explore this topic in detail. 

Why Do People Apply for an IPO?

Let’s begin by understanding the reasons people apply for an IPO. IPO investments are appealing due to their potential for high returns. Other reasons include: 

• Opportunity for Growth: IPOs allow investors to get shares at a potentially lower price before they trade on the stock exchange. 

• Portfolio Diversification: IPOs offer a way to invest in new and growing sectors. 

• Ownership: By buying shares in an IPO, investors become partial owners of the company. 

For parents or guardians, IPO investments in a minor’s name can also be a way to secure their child’s financial future. 

Can A Minor Apply for an IPO? 

Yes, minors can apply for an IPO, but they must meet specific conditions. Since minors are not legally allowed to enter into financial agreements, the application must be made under the supervision of a parent or legal guardian. 

• Minor's Demat and Bank Accounts: To apply for an IPO in a minor's name, a Demat account and a bank account must be opened under their name, managed by a guardian. 

• Legal Requirements: SEBI regulations and company-specific guidelines allow minors to participate in IPOs under the oversight of their guardians. 

Process of Applying for an IPO in a Minor’s Name 

Applying for an IPO in a minor’s name involves several steps: 

1. Open a Minor Demat Account

• The account must be opened with the minor's name and their guardian as the account operator. If the minor does not have a PAN card (mandatory requirement for a regular Demat account), then the guardian’s PAN can be used. 

• Required documents include the minor's birth certificate, Aadhaar, and the guardian's KYC details. 

2. Link a Minor Bank Account  

• The bank account must also be in the minor’s name, with the guardian as a co-holder. 

3. IPO Application 

• Use the ASBA (Application Supported by Blocked Amount) process to apply for the IPO. 

• Select the Minor's Demat Account and bank account for the application. 

• Offline mode can also be used by filing a physical minor IPO application with your broker. 

4. Allotment and Holding 

• Shares allotted to the minor are held in their Demat account until they attain majority. 

In case you wish to do share trading for the shares you received after a successful IPO bid, then the minor’s Demat account will need to be linked to the guardian’s trading account. This is because a minor Demat account can only be used to store securities. To sell shares, you need a trading account.  

If a parent applies for an IPO on behalf of their 10-year-old child and the IPO shares are allotted, the shares will remain in the child's Demat account, accessible only when they turn 18. 

Benefits of Applying for an IPO in a Minor's Name 

Applying for an IPO in a minor's name offers several benefits that can set the foundation for a financially secure future. Here’s a closer look:   

1. Early Start in Investing: Starting investments in a minor's name allows them to benefit from the power of compounding. Over time, even small investments can grow significantly, creating a robust financial portfolio by the time they reach adulthood.   

For example: If a guardian invests ₹ 50,000 in a minor's name through an IPO that grows at an annual compounded rate of 12%, the investment could grow to approximately ₹ 3.1 lakh by the time the minor turns 18.   

2. Financial Security for Future Goals: Investing in an IPO in a minor’s name ensures that funds are earmarked for their future. The returns can be utilised for essential expenses like higher education, marriage, or starting a business. Potential dividends, stock splits, and bonus shares offered by the company can lead to a substantial corpus for the minor. 

3. Long-Term Investment Perspective: Minors’ investments are typically held for the long term if they’re sold or traded until the minor reaches adulthood. This enforces a disciplined, long-term investment approach, often leading to better returns.   

4. Educational Opportunity for Minors: Involving a minor in the investment process can be an excellent way to teach them the basics of financial markets, IPOs, and wealth management. Early exposure to these concepts can help build their financial literacy and confidence in managing money as they grow.   

What Happens When Your Minor Attains the Age of 18 Years? 

When a minor turns 18, the following changes occur: 

1. Demat Account Conversion 

• The minor's Demat account can be converted into a regular account by replacing the existing details of the guardian with the minor’s.  

• Or, the existing Demat account can be closed and a new regular Demat account can be opened after completing the KYC process. 

2. Ownership Transfer

• The guardian's authority over the account ceases, and the individual gains full control of the shares and accounts. 

3. Bank Account Update

• The linked bank account (if changed) should be updated to reflect the individual’s sole ownership. 

Other Factors/Risks to Keep in Mind

While applying for an IPO in a minor's name has benefits, it also involves certain risks and considerations: 

• Market Volatility: IPO investments are subject to market risks, which could affect the value of the shares. 

• Regulatory Changes: Changes in SEBI guidelines could impact minor IPO applications. 

• Limited Access: Minors cannot access or manage the shares until they turn 18. 

• Tax Implications: Earnings from IPO investments in a minor's name are added to the guardian's income, which may increase your tax liability. 

Conclusion 

So, as you must know by now – minors can indeed apply for IPOs, offering them a unique opportunity to begin their investment journey early. However, the minor IPO application process requires careful planning and adherence to regulatory guidelines. Guardians must weigh the benefits and risks before proceeding, ensuring the investment aligns with their long-term financial goals.