How To Apply For An IPO In A Minor's Name

How To Apply For An IPO In A Minor's Name

When a private corporation starts to offer shares in a new stock issuance, an Initial Public Offering (or IPO) is created. Most businesses have limited shareholders before the allocation, such as the founder, close friends, and angel investors.

There are two forms of IPOs: fixed price and book building. The former speaks about stock prices that the corporation predetermines. In contrast, in the latter case, corporations provide potential buyers with various values at which shares may be offered. IPOs have been around for over four centuries and have gone through highs and lows in terms of issuance.

Initial Public Offerings: What Makes Them Important?

IPOs draw a lot of media coverage, mostly created on purpose by businesses to create buzz. Numerous investors are drawn to them because of the volatility of their price movements, which can produce significant sums of money. Investors must be aware that IPOs may experience swings. Before investing in an IPO, one should consider their risk tolerance, financial situation, and the prospectus of the company in question.

Benefits of Applying for an IPO in a minor's name

Many people frequently consider investing in a minor's name for various reasons. Starting young will allow you to teach a minor the value of saving and how it can result in capital gains when investments are made frequently. Besides, such investments are more tax advantageous. The money saved until the child enters adulthood is considered theirs entirely and isn't included in their parent's income, which may be sizable and lead to higher taxes. These investments are sometimes viewed as trusts for children, which are only meant to be touched later on to be used for their future.

Applying for an IPO

Let's presume that the minor has a separate source of income and that this revenue is being used for investment. Make sure the names are listed in the IPO application in the same order as in the Demat account. The application should be completed in the same order if the minor is the primary holder and the guardian is the secondary holder.

Tax Implications

When you submit an application for an IPO in your child's name, the tax implications stay the same. For their IPO investments, both short-term and long-term capital gains are available.

According to financial advisors, investing in a minor's name is ineffective. They reason that guardians and parents should make investments in their names before leaving such investments to their children. In this way, they can avoid the hassle of dealing with new bank accounts and other regulations.

Requirements for making an IPO bid

If certain requirements are met, minors may participate in an IPO. As shares allocated will be credited to it, the applicant must have a Demat account to bid for an issue. A PAN and bank account are also needed to register a Demat account. Minor won't typically be given a PAN because they don't usually have their source of income.

Minors can open a Demat account using their parent or guardian's PAN and bank account. Opening a separate banking account in the minor's name is not necessary. The majority of stockbrokers permit small Demat accounts but not trading accounts.

Minors may link their trading account to their parent's or guardian's bank account using that account (in the guardian's name). However, some brokers permit trading and Demat accounts to be opened in a minor's name. 

Additionally, a minor's Demat account can only be held in their name and not as a joint holder. Be careful to open the Demat account well before you plan to invest in an IPO. The applicant must complete two KYC application forms, one for the parent or guardian and one for the minor (both of which must be signed by the parent or guardian).

How do I submit a minor's Initial Public Offering (IPO) application?

A minor must have access to an online Demat account with a permanent account number to submit an IPO application on their behalf. It is better if it is in their parents' name because minors aren't always given PANs because they don't have any source of income. 

Demat accounts are allowed, but trading accounts are not. A minor's Demat account must be connected to a parent's or guardian's trading account for stockbrokers to access it, and the minor's bank account is then linked to this account. A Demat account must be operational, and KYC documents must be provided in the minor's and parent's names before expressing interest in an IPO.

There are three ways to apply for an IPO on a minor's behalf: via paper application form delivered to the branch and net-banking ASBA IPO application. Through their stock broker, minors over 15 can also apply through UPI.

  • ASBA IPO Net-Banking Application: Only a few banks, like HDFC, permit minors to submit an IPO application using their net-banking account. The easiest way to submit an IPO application in a minor's name is in this manner. Remember that the principal account holder for both the bank account and the Demat account used for the IPO application must be the same (same PAN number).
  • Paper-based IPO Application: You can submit the paper-based IPO application to your bank branch if your bank does not offer online IPO applications for minors.
  • UPI as a Payment Method (Minor Over 15 Years Old): Minors over 15 can access online banking and create UPI IDs. After setting up your UPI ID, you can apply for an IPO through any stockbroker who supports UPI-based IPO applications. A child may apply for up to Rs 5 lakh worth of shares in an IPO using UPI.

What happens when a minor reaches 18?

Minors have two options when they attain 18 years of age. They can keep the active minor account open and create a new one or convert their minor Demat account into a major one. The latter can be done by substituting the information for their parents or guardians with their own.

It is because the person had to use a Demat account while still a minor that was in their name but contained information about their parents or guardians, a trading account that was linked to their Demat account was not theirs because they were ineligible for it. Their PAN card was also in the name of their parents or guardians.

Once kids turn 18, they become eligible for all such accounts and cards and can update the information on them, close them, and begin over.

Conclusion

Your child will have a strong financial foundation when they become adults if you make an IPO investment in their name. This can help them become financially independent and build a corpus for their higher education. 

IPOs are fantastic for investing in, but you should constantly be aware of the company's background information. Before investing in any company, the first step should be to read the red herring prospectus. Look at why a company is choosing to convert its private shares to public ones. Sometimes a business would do this to pay off its debts, which implies that your money will not be used by the business to increase profits but rather to settle debts. Hence, it is important to do due diligence before investing in an IPO. 

FAQs

Is it advisable to make IPO investments in your child's name?

It's crucial to understand why you're choosing a certain investment, whether it's an IPO or anything else. For instance, it can be a good approach if you want to invest in IPO to create wealth over the long term for your child's financial future. However, if you invest in IPOs in your child's name to gain a tax break, remember that any income the youngster earns will be combined with the parent's income, and you will then need to pay the necessary tax on that.

Before making any financial decisions, assess your goals and intentions, and pay particular attention to your child's future.

Can we purchase shares on behalf of a minor?

A minor cannot purchase stocks. Instead, the guardian can either acquire new stocks and transfer them into the minor's account or transfer existing stocks to their Demat account. Minors may also invest in the stock market, but the guardian must manage the Demat account, trading account, and bank account.

Can minors be allocated shares?

Yes, if shares of a corporation are given to a minor as a gift, the minor may become a shareholder. Due to their inability to form a legally enforceable agreement, minors cannot purchase shares under a share purchase agreement to become shareholders.

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