The importance of nomination has been repeatedly emphasized by various regulators to streamline and facilitate the process of transfer of assets after the demise of an investor. The appointment of a nominee for financial assets appears to be a very simple process, but it needs to be carefully considered by the investors so that it does not become cumbersome for their successor.
The provisions of nomination as mentioned in the Indian Succession Act, Insurance Act, Banking Regulation Act, National Savings Certificate Act are different from the provisions of nomination mentioned in the Companies Act and the depository bye-laws; This thus affects the nominations made against an investor’s shares and mutual fund holdings.
Section 72 of the Companies Act 2013 states, “Every holder of the securities of the company may, at any time, in the prescribed manner, nominate any person to whom in the event of his death his securities shall vest… other law for the time being in force or in any disposition …”. In simple words, nomination made in respect of securities (Shares, Debentures, Mutual Funds) shall be entitled to all beneficial rights (bonuses, dividends, right to participate in meetings). , etc.) and the nominee will become the beneficial owner. In accordance with this section, the court upheld the rights of the nominee for legal heir in the “Kokate” case. However, this argument was countered in the “Salgaonkar” case, which held that the legal heirs prevailed over the nominees. In the Salgaonkar case, it was argued that section 72, the Companies Act was not intended to provide for the mode of succession or to deal with the succession meant to represent the deceased shareholder, as the value of the shares is subject to market forces, and to ensure that delays on the part of legal heirs in establishing their rights of succession do not harm commerce and claim shares of a company. However, this decision has been challenged in the Supreme Court.
The rights of the nominee as provided in the Companies Act are in stark contrast to the rights of the nominee in the case of other financial assets. An analysis of various case-laws relating to banks and insurance reveals that the rights of legal heirs supersede the rights of the nominee. A nominee is treated as the trustee of an asset and has a fiduciary duty to ensure that the asset is transferred to the legal heir in accordance with the applicable succession Acts. In addition, nominations cannot override the law regarding testamentary (by will) or testamentary succession (in the absence of any will). It has been held by the courts that the purpose of nomination is to ensure that the property or rights of the deceased subject of nomination are protected until appropriate steps are taken by the legal representatives of the deceased. According to the Indian Succession Act, 1925, the property of the deceased shall be transferred as per his last will and in the absence of any will, the legal heirs are the ultimate beneficiaries of the deceased’s property.
Most of the court’s rulings on various financial assets have clarified that nomination cannot take away the rights of succession. However, the existence of nomination clause in the Companies Act still creates confusion and ambiguity as it clearly states that on the death of the shareholder, the right to own the securities rests with the nominee, irrespective of the application or nature of any law. it happens.
The decision to enroll in securities markets has been challenged in various courts and clarity is yet to emerge. The apex court is yet to understand and dispose of matters relating to this section of the Companies Act in the ongoing ‘Salgaonkar’ case. The next hearing of the case has been fixed for October 19. Thus, in order to avoid litigation in various courts regarding asset matters relating to financial products (insurance proceeds, shares, debentures, mutual funds etc.), it may be decided that only one legal heir as nominee can be declared, and various financial service providers must obtain mandatory enrollment when selling products.
Kuldeep Thareja, Mitu Bhardwaj and Rasmeet Kohli are working with the National Institute of Securities Markets.
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