This article is written by Akhil Krishnan, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here he discusses “How to nominate the shares in your own name”.

Introduction

Section 72 of the Companies Act, 2013 allows the shareholders of a company to nominate securities of a company to a nominee. The term securities shall include the shares of a company. The nomination of shares is made through a written instrument. The person described in the written instrument is called as a nominee. The nomination shall act as a direction to the company regarding the ownership of shares after the death of the shareholder. A nominee shall have interest over the shares held by the shareholders on their death. This devoids the complexity faced by the companies regarding the ownership of shares of the deceased shareholder.  A nomination can be filed by the shareholder anytime during his lifetime. 

Appointment of a Nominee

 It is not mandatory to appoint a nominee. Only individuals holding shares singly or jointly can nominate their shares. Non-individuals such as body corporates, trusts, societies,  Karta of Hindu undivided families and holder of power of attorney cannot nominate the shares. If the shares are being held jointly, then the joint owners have to select a single nominee for their shares. The Act does not lay down any criteria or requirements for being a nominee. Even a minor can become a nominee. In such case the guardian signs on behalf of the minor in addition to the name, address and photograph of the minor and the guardian. However, the shareholder nominating minor should also appoint a person in the event that the nominee dies during his/her minority.

Applicable rules in relation to the nomination are enumerated in the Rule 19 Companies ( Share Capital and Debenture Rules) 2014.

Nomination of Shares

The nomination of shares has to be filed in writing in the prescribed Form SH-13.  Share certificates need not be attached to the nomination form. A person making the nomination can request for making a nomination. The share transfer agent of the company, upon receipt of such request, shall register the name of the nominee by allotting a registration number along with the date of registration. The company have to main the register for nominations and shall get it authenticated by a Company Secretary from time to time. Any alterations or cancellation can be made to the nomination by filing Form SH-14 which shall take effect from the date which the company receives such alteration or cancellation. If a joint owner of shares die and the new owner comes in his place, the joint owners can request for cancellation and make a fresh nomination by repealing the existing nomination.

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On receipt of the intimation of death of the shareholder, the nominee has the option to either register himself as the owner of the shares or to transfer the shares to a third party. If the nominee wishes to take up the shares in his name, he shall mention the same in writing to the company. Stamp duty will not be applicable in such transmission.

The nominee on the death of the deceased shareholder has to file a notice with the company along with the death certificate of the shareholder, proof of identity and specimen signature of the nominee. The company shall verify its nominee register and decide whether the nominee is a valid nominee. A nominee unwilling to take up the membership of the company can use his power as a nominee to transfer the shares to a third party. Such transfer shall be subjected to all the limitations, procedures and restrictions imposed on the transfer of shares by the Act. All the usual procedures for the transfer of shares will apply to such transfers. The nominee should execute a transfer deed prescribed in the Form SH-4. The transfer deed should be properly executed and stamped. If the nominee dies before the shareholder, the nomination gets cancelled and the heirs of the nominee are not entitled to the shares.

Shares held in the Demat Account

If the shares are held in dematerialised form, the nomination made by the shareholder has to recorded by the Depository participant who is maintaining the Demat account.

At the time of opening a Demat account, the shareholder can fill in the details of the nominee along with the particulars, residential address and bank account for the transfer of dividend. If an investor has not added the nominee for his Demat account he can add or change a nominee subsequently. In this case, the Demat account goes to the nominee after the death of the investor. The Demat account nominee need not inform the company separately about the death of the investor. 

Rights of the Nominee 

After the death of the shareholder, the nominee gets all the rights in the shares held by the deceased shareholder. He can deal with the shares by either registering the same in his name or by transferring the shares to a third party. If a nominee registers himself as a member of the company, he shall be entitled to get the dividends and all other interests paid to the shareholders of the company. He can exercise all the rights of membership described under the articles of association of the company.  However, the ownership of the nominee has been put into question during various instances, especially during conflicts with the legal heirs of the deceased. 

Various judgements from Bombay High Courts have cleared the position of the nominees. Initially, the nominees had an upper hand with regards to the shares of the deceased when compared to the legal heirs. The Delhi High Court in the case of Dayagen Pvt. Ltd. v. Rajendra Dorian Punj the nominees had exclusive ownership in the shares of the deceased shareholder. But the ambiguity arose from the two single bench decisions of the Bombay High court. Harsha Kokate v. The Saraswat Co-operative Bank Limited (Kokate case) and J. J. Salgaonkar v. J.J. Salgaonkar(Salgaonkar case).  

In the Kokate Case, the High court considering the section 109A of the earlier Companies Act,1956 held that all the securities of the deceased shareholder go to the nominee instead of legal heirs. The Court held that the intention for nomination is to vest the property of shares, thereby giving ownership. After this judgement, a different bench of the Bombay High Court while deciding the Salganokar case depicted the indifference in its opinion with regards to this matter. In the  Salganokar case, the court held that the decision of the court in Kokate case was against the decision of the Supreme Court. This time the court held that the position of a nominee was to merely hold the securities and the nomination does not have the power to override the succession laws prevailing at the time. 

The controversy set out by the aforesaid decisions were laid to rest by a division bench of the Bombay High Court in Sakti Yazdani v. Jayanand Salagaonkar. The following issues were addressed by the court:

1. Whether a nominee of the holder of shares/securities under section 109A of the 1956 Act is entitled to the beneficial ownership of those shares/securities to the exclusion of all others who are entitled to inherit the same as per succession laws?
2.  Whether a bequest made in a Will in respect of shares/securities of a deceased supersedes a nomination made under the 1956 Act?

The court considered the decision in the Kokate case to be per incuriam or careless and upheld the decision of the Salganokar case,  The court held that the nomination shall not at any time supersede the law of testamentary or intestate succession. The Court did not see any point in considering the nominee superior to the legal heirs.

Conclusion

Section 72 of the Companies Act 2013, stands pari materia with the section 109A of the erstwhile Companies Act 1956. The division bench of the Bombay High court reiterated that there are only two modes of succession: testamentary and intestate. The court abrogated the third method of succession brought in through nomination in the Kokate case. The provision for the nomination was considered as an intermediary or temporary possession of shares.  The true power in the ownership of shares lies with the legal heirs who can claim the same through succession or inheritance in accordance with the law. At present, the legal position holding ground is that a nomination under the Companies Act does not create a third mode of succession. A nominee is just a trustee for the legal heirs of the deceased shareholder. Nominees shall have a fiduciary relationship with the legal heirs to safeguard the shares and preserve the commercial value of the shares until the will of the shareholder is executed. A nomination is a useful procedure that enables a company to select a single legal representative of a deceased shareholder to transmit his shares and also avoids the need to deal with a host of legal heirs who might be reeling under inheritance disputes. But the nomination alone is not sufficient to create ownership in shares. It is just a device to mitigate complexities in the transmission of shares for the benefit of companies. 

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