Time to settle the debate on nominations

The provisions on nomination mentioned in the Indian Succession Act, Insurance Act, Banking Regulations Act, National Savings Certificate Act differs from the provisions of nomination mentioned in the Companies Act and the bye laws of the depositories; thereby impacting the nomination made against shares and mutual funds holdings of an investor.

Section 72 of companies Act 2013 states “Every holder of securities of a company may, at any time, nominate, in the prescribed manner, any person to whom his securities shall vest in the event of his death… Notwithstanding anything contained in any other law for the time being in force or in any disposition…”. In simple terms, a nomination made in respect to securities (shares, debentures, mutual funds) will be entitled to all beneficial rights (bonus, dividend, rights to attend meetings, etc.) and the nominee will become beneficial owner. Going by this clause, the court upheld the rights of nominee to the legal heir in the “Kokate” Case. However, this reasoning was countered in the “Salgaonkar” case wherein it was held that legal heirs prevail over the nominees. In Salgaonkar case, it was argued that the purpose of Section 72, Companies Act, is not to provide the mode of succession or to deal with succession. It was meant to represent the deceased shareholder, as value of shares is subject to market force, and to ensure that the commerce does not suffer due to delay on the part of the legal heirs in establishing their rights of succession and claiming the shares of a company. However, this ruling has been challenged in the Apex court.

The rights of a nominee provided in the Companies Act is in stark contrast to the rights of a nominee in case of other financial assets. Analysis of various case-laws relating to banks and insurance showcase that rights of legal heirs supersede the rights of the nominee. A nominee is considered as a trustee of an asset and has the fiduciary duty of ensuring that the asset is transferred to the legal heir as per the applicable succession acts. Further, nominations cannot override the law in relation to testamentary (as per a will) or intestate succession (in the absence of any will). It is held by the courts that nominations are intended to ensure that the estate or the rights of the deceased subject matter of the nomination are protected till the legal representatives of the deceased take appropriate steps. As per the Indian Succession Act, 1925, assets of the deceased will be devolved as per his/her last will and in the absence of any will, legal heirs are the ultimate beneficiary of the deceased’s estate.

Most of the court rulings on different financial assets have pronounced that nomination cannot overrule succession rights. However, the existence of the nomination clause in the Companies Act still creates confusion and ambiguity as it explicitly cites that upon the death of the shareholder, the right to own the securities vests with the nominee irrespective of any law in force or in disposition.

The verdicts on nomination in securities markets has been contested in the various courts of law and clarity is yet to emerge. The Apex court is yet to decipher and dispose of matters related to this clause of the Companies Act in the ongoing ‘Salgaonkar’ case. The next hearing for the case is scheduled for 19 October. Thus, to avoid litigation in various courts about estate matters concerning financial products (insurance proceeds, shares, debentures, mutual funds etc.), it may be decided that only a legal heir can be declared as a nominee, and various financial services providers should seek mandatory nomination at the time of selling the product.

Kuldeep Thareja, Mitu Bhardwaj & Rasmeet Kohli are working with the National Institute of Securities Markets.