What are IPOs?

Initial Public Offerings (or IPOs) are formed when a private corporation begins to offer shares in a new stock issuance.  Prior to this issuance, most companies have a limited number of shareholders including the founder, their close relations and / or angel investors. Only when companies believe they are ready to stand on their own two feet and not be swayed by regulations pertaining to public shareholding do they promote their possible transition to public ownership. The sale of shares allows the corporation to generate capital from public investors. By transitioning from a private to public company, current private investors are able to discern the success of their shares brought on by share premiums. Share premiums refer to the difference between the par value of a company’s shares set against the amount of funds received for recently issued shares. Share premiums constitute the capital generated by the funds provided by investors in exchange for a percentage ownership of the company under consideration. These premiums can encourage other traders to invest in a given company’s shares. A company’s share premiums seesaw based on their shares current market values as opposed to their par value. Only after due diligence are share prices of a company’s IPO established.

The Securities and Exchange Board of India (SEBI) is responsible for monitoring whether IPOs can be formed, and for the entire investment process made available to prospective buyers. Company prospectuses are vital to understanding how a given company plans on spending the money it generates from investors & its plans of expansions. It can be particularly illuminating and allows for one to make informed decisions.

IPOs Exist in two forms – (i) fixed price and (ii) book building. The former refers to share prices that are predetermined by the company. Conversely, companies offer prospective buyers a range of prices for which shares can be bid in the case of the latter.

IPOs have been in existence for over 4 centuries and have experienced highs and lows in their issuance. Certain sectors have experienced more pronounced uptrends and downtrends owed to what the company vends, innovative factors, and general economic considerations.

Why are they important?

IPOs receive a lot of media attention some of which is intentionally cultivated by companies themselves in order to create a buzz surrounding them. Investors are often drawn in by their volatile price movements which can generate large sums of money. IPOs can experience fluctuations as well and investors must be aware of these facts. One’s own risk tolerance and financial circumstances must be considered along with a given company’s prospectus before investing in their IPO.

Importance of investing in a minor’s name –

Several individuals often consider investing in a minor’s name for a number of reasons. By starting early, you can teach a minor the importance of saving & how it has the potential to bring in capital when investments are made with regularity.  Investments made in a minor’s name are more tax efficient. Funds accrued up until the minor attains adulthood are considered to be solely theirs & aren’t clubbed with their parent’s income which could be significant and therefore lead to higher taxes. At times such investments are considered to be trusts for minor’s that are only meant for their future and aren’t touched early on.

How to apply for an IPO for a minor –

In order to apply for an IPO in a minor’s name, said individual must have access to a demat account issued in their name along with a permanent account number (or PAN). This PAN is ideally in their parents’ name as minors aren’t always issued these as they don’t normally have their own sources of income. While demat accounts are permissible, trading accounts aren’t. A minors demat account must therefore be linked to a parent or guardians trading account for stockbrokers to access.  This account is then linked with the bank account used by the minor. KYC forms in the name of the minor & parent must be submitted & the demat account should be functional prior to any interest shown in an IPO.

Third party applications supported by blocked amounts (ASBA) provided by banks are ideal to bid on an IPO. It is important to note that when considering ASBA as a payment method, banks don’t make banking facilities available to minors. Parents can access a minor’s account by making use of their own ID.

Public banks, which allow for five IPO applications per bank account, permit one of these to be in the name of a minor. In the case of private banks, the PAN number of the guardian is preselected in the minor’s stead when applying for an IPO which is done via net banking.

Once minors turn 15, they can avail of an IPO application by using their guardians PAN provided they have a bank account that is solely theirs.  Minors aren’t eligible for tax deductions and any and all gains are subject to being taxed the way equity investments are taxed for adults.  Once minors come of age, they can close existing demat accounts and open new ones. Else, they can convert it to a major account & replace their guardians’ information with their own.

Advantages derived from IPOs

Investing in IPOs is advantageous for a number of reasons. IPOs allow you to invest in a company at the most latent stage available to the public. These companies have high growth potential which implies your initial investments have the potential to soar. Today, several privately held startup companies have a valuation of over $1 billion and are dubbed unicorns. When such companies threaten to go public there is a race to own their IPOs as they glimmer with the possibility of elephantine income generation.  As equity investments, IPOs are capable of providing investors with large returns over a long period of time. Thus, they can be used to fill expensive fiscal goals like purchase of a car or can serve as retirement funds.

Once approved by the SEBI and listed as public, IPOs have greater transparency as they are held accountable. By making it mandatory to list price per security issued on IPO order documents, investors of IPOs have access to the same information as those who existed when the company was private. This privilege is not available to those who choose to invest after the initial public offering. Prices are then determined by the market and what a stockbroker might be able to provide.

Investing in small but promising companies at the time of an IPO could be particularly advantageous as they might even provide a discount which could allow for even larger returns on investment.