What are the Restrictions in Minor Demat Account

A minor Demat account is a type of depository account that can be opened on behalf of individuals below 18 years of age, primarily for the purpose of investing in securities like shares, bonds, and mutual funds. While minor Demat accounts enable early financial planning, there are several restrictions and limitations associated with their operation due to legal and regulatory considerations. These restrictions aim to protect minors from risks associated with the financial markets, ensuring that the investments made are in their best interest.

In this blog, we will explore in detail the various restrictions imposed on minor Demat accounts in India, focusing on real data and up-to-date, accurate information.

Overview of Minor Demat Accounts

A Demat account, short for “dematerialized account,” is used to hold financial securities like stocks, bonds, and ETFs in electronic form. For minors, such accounts are opened and managed by a guardian (usually a parent or legal guardian) until the child turns 18. Upon reaching adulthood, the minor Demat account is converted into a regular Demat account, allowing the now-adult account holder to manage the investments independently.

Minor Demat accounts offer a good platform for parents or guardians to begin investing on behalf of their children, ensuring a robust portfolio when the minor reaches legal adulthood. However, there are significant restrictions placed on these accounts to protect minors from the high-risk aspects of stock market trading.

Restrictions in a Minor Demat Account

1. Inability to Trade in Derivatives and Futures Markets

   One of the most critical restrictions in a minor Demat account is the prohibition on trading in derivatives, such as futures and options. These instruments are typically leveraged and carry high risks, which are considered unsuitable for minors.

   • Derivatives Trading: Futures and options (F&O) are high-risk financial instruments because they allow the investor to bet on price movements with a smaller initial investment but can lead to significant losses. To protect minors from these risks, regulations do not allow minor Demat accounts to participate in F&O trading.
   • Regulatory Standpoint: As per the guidelines issued by the Securities and Exchange Board of India (SEBI) and the National Stock Exchange (NSE), a guardian operating a minor’s Demat account cannot engage in derivatives trading on behalf of the minor. This is primarily due to the complexity and risk associated with these instruments, which are deemed unsuitable for individuals under the age of 18.

2. No Intraday Trading Allowed

   Another restriction for minor Demat accounts is the inability to participate in intraday trading. Intraday trading refers to the practice of buying and selling stocks within the same trading day. While this type of trading can generate quick profits, it also comes with a high level of risk and speculation.

   • Why Prohibited? Intraday trading requires constant monitoring of the stock market and carries higher volatility compared to long-term investments. Since minors are not considered capable of making such quick, informed decisions, SEBI regulations restrict this activity for minor Demat accounts.
   • Investment Focus: Instead of intraday trading, minor Demat accounts are geared toward long-term investments in stocks, bonds, and mutual funds, which are relatively safer options for wealth accumulation over time.

3. Restrictions on Selling of Securities

   The guardian’s role in selling securities from a minor’s Demat account is highly regulated. While the guardian can buy securities on behalf of the minor, selling them can require special procedures depending on the specific depository participant (DP) and the stockbroker managing the account.

   • Guardian’s Responsibilities: SEBI guidelines make it clear that the guardian must act in the best interest of the minor, and any transaction, including selling of securities, should benefit the minor. Some brokers may require additional documentation or declarations when selling securities from a minor Demat account.
   • Case in Practice: For example, if a guardian wishes to sell shares from a minor’s account, certain brokers may mandate submitting an affidavit declaring that the sale is being made in the best interest of the minor.

4. No Power of Attorney (PoA)

   In regular Demat accounts, account holders often give Power of Attorney (PoA) to their brokers, allowing them to execute trades on their behalf. However, in minor Demat accounts, the granting of PoA is strictly prohibited.

   • Guardian’s Role: Since the minor is not legally authorized to make trading decisions, the guardian acts as the sole authority managing the account. This ensures that the broker cannot make any trades on the account without the explicit instructions of the guardian.

5. No Margin Trading Facility

   Margin trading, which involves borrowing funds from a broker to trade larger volumes of shares than one can afford, is another facility that is unavailable in minor Demat accounts.

   • High Risk: Margin trading is a highly leveraged form of trading that can lead to substantial losses, particularly in volatile markets. To protect minors from exposure to such risks, financial regulators in India do not allow margin trading in minor Demat accounts.

6. Guardian’s KYC and Documentation Requirements

   When opening a minor Demat account, the Know Your Customer (KYC) norms and documentation requirements must be met not just for the minor but also for the guardian.

   • Required Documents: The guardian must submit personal identification documents such as PAN card, Aadhaar card, and proof of address. The minor’s birth certificate or a school ID card is typically required to confirm the minor’s age.
   • Guardian’s Role: The guardian’s financial background and experience may also be considered by some financial institutions before allowing certain types of investments. This additional layer of scrutiny ensures that the account is managed responsibly.

7. Limited Access to Online Trading Platforms

   Some online trading platforms limit the features available to minor Demat account holders. While the guardian can still manage long-term investments in stocks, bonds, and mutual funds, certain features related to high-risk trading may not be accessible.

   • Limited Tools: For example, tools that facilitate intraday trading, short selling, or margin trading are typically disabled for minor Demat accounts on popular online trading platforms.

8. Conversion to Regular Demat Account at 18

   When the minor turns 18, the account must be converted into a regular Demat account. The now-adult account holder is required to complete their KYC process and submit updated documents to the depository participant.

   • Procedure: The financial institution managing the minor’s Demat account usually sends a notification to the guardian or the minor before the minor’s 18th birthday, prompting the necessary updates.
   • Account Holder’s Role: Upon turning 18, the individual gains full control of the account and can engage in all types of transactions, including intraday trading and derivatives, based on their own financial goals and risk tolerance.

Bottom-Line

A minor Demat account is an excellent way to introduce young individuals to the world of investing. However, to safeguard their financial future and protect them from high-risk activities, several restrictions are in place. These restrictions, such as prohibiting derivatives trading, intraday trading, margin trading, and the granting of Power of Attorney (PoA), are designed to ensure that investments made on behalf of minors are safe and in their best interest.

For guardians, it is essential to be aware of these limitations and focus on long-term wealth-building strategies like investing in stocks, bonds, and mutual funds. Once the minor turns 18, they can fully access the account and assume control over their investments, with the freedom to engage in a broader range of trading activities.