This article is written by Keshav Bhardwaj, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. 

Introduction

The Nomination of shares is a useful instrument that empowers a company to decide a legal representative for transferring the shares and to avoid any kind of conflict with the legal heirs. The Company Act, 2013 enables securities holders to declare nomination regarding his shareholding in the company. A written expressed statement by securities holder nominating a single individual to whom all shares will be bequeathed in case of death of the securities holder. For example, a securities holder nominated his son/daughter as a nominee to get shareholding of Reliance Industries Limited Company in the event of death.

The shares are easily transferable capital under law. Although it is freely transferable, still all securities holders have to adhere to certain restrictions given under the Articles of Association. The Nomination form is only to provide direction to the company concerning the transmission of shares in the instance of his death. Stamp Duty to be paid in case of transfer of Shares, but it’s not payable in case of transmission do share. In case of nomination of shares are transmitted in the event of the demise of securities holder.

The historical journey started in Section 109 A and 109B of the Companies Act, 1956. It provides securities holder authority to appoint a nominee in the event of the death of the securities holder or joint holder. The nominee can get the securities without presenting any succession document except there is any Alternation or Cancellation in Nomination. Correspond to these provisions; notes to clauses were presented in Companies Bill, 2011. Another effort was made by press release dated July 23, 1999, to uplift the economy and to promote the investment in the country by removing barriers e.g. obtaining a letter of succession from the competent authority.

Rules regarding Nomination and procedure for Nomination of shares

Companies act hasn’t discussed any definite criteria for the appointment of Nominee. It’s not compulsory to appoint a nominee under any rule. Section 72 of the Companies Act, 2013 (previously Section 109A of the Companies Act 1956) – Power to Nominate and Rule 19 of Companies (Share Capital and Debentures) Rules, 2014 describe various aspects regarding Nomination, which are the following-

• Who can nominate- The only person holding individually or jointly can nominate any person as Nominee. But the Non-Individuals like society, trust or any corporate body, Karta of Hindu Undivided Family, the person holding power of attorney can’t make any nomination.
• The nomination of person- Every securities holder allowed to nominate any individual as Nominee in the prescribed manner [Form No. SH-13] at any time. The individual who is nominated as Nominee can vest the share after the death of a securities holder. E.g. A (Nominee of B) has requested the company to provide him share with its rights after the death of B (securities holder).
• • Joint Holder- Joint Holder includes persons who are together holding rights over the shares of the Company. In this case, the joint securities holder together nominates a person to be the Nominee [Form No. SH-13].

• Registration of Nomination- Immediately after the nomination is completed, the entry shall be registered by the securities holder for the record maintained by Section 88 of the Companies Act, 2013. The nomination application must be recorded by the company within 2 months of receipt filed and nomination form signed.
• Alternation or Cancellation of Nomination- The Nomination may be revoked or altered by nominating any other individual in place of the present Nominee by the securities holder who has made nominated, by giving the intimation to the Company in [Form SH-14]. The Alternation or Cancellation takes place when the Notice of Alternation is received by the company. Here are some events-

(i) If one of the Joint-Shareholder gets died after the appointment of the nominee. Then, another shareholder can cancel the revoke nominee and appoint a new person as the nominee.

(ii) If the nominee dies before the shareholder, the nomination automatically considered as revoked.

The nominee can get all the rights vested with securities holders in the event of death. All other members excluded unless Nomination gets Cancelled or altered.

• If the nominee is Minor- The guardian has to sign on the behalf of the minor for his appointment as a nominee. Also, the name, address of the minor along with the name, address of the Haitian must be submitted. 

In this circumstance, recommended appointing an Individual [Form SH-13], who will be entitled to Shareholding in the event of the death of the Nominee during the Minority period.

• Non-Resident as Nominee- The Non-Resident can be appointed as the Nominee in the Resident Account. There is no such restriction regarding the nomination of Non-Resident.
• After the death of Securities Holder or Joint-Holder- The Individual appointed as the Nominee after the production of evidence before the Board, either-

1. Register himself as securities holder
2. Transfer of the securities

In case the nominee chooses to register securities holder thereafter required to send a written notice with signature. It asserts his purpose along with the Death Certificate of the deceased securities holder or debenture holder.

• Share Transfer deed & Restriction on transfer- The Nominee requires to execute the transfer deed in the prescribed form [SH-4] with proper execution and stamped.

Such transfers as given in above section point (b), shall subject to certain restrictions, limitations & systems imposed on the transfer of shares under the Act. All the general procedures in case of a securities transfer.

Rights of Nominee

The nominee plays a vital role: he/she has no rights over the capital or securities unless any will or the nominee is going to inherit the money. Hence, He is merely a custodian of the Securities. While he claims he will have to provide all basic proof for confirmation to the depository and the relevant authority. The Rights provided to the Nominee after claiming follows- 

• The shareholder rights get transmitted to the Nominee immediately after his death.
• The nominee will be able to enjoy the rights of the deceased only after registering himself as a member of the company.
• The Nominee gets additional rights if there are any such clauses in the Article of Association of the Company e.g. Meeting or Voting Rights.

Position of Nominee in conflict with Legal Heir through Judiciary Scenario

The judiciary has taken a parallel view for many years. Some Judgment stated Legal Heirs will be entitled to the ownership as per Succession Right. On the other side, the Nominee appointed at this position supersedes over the legal heirs. Let’s understand the perspective of the Judiciary through some landmark cases.

In Dayagen Pvt Ltd. v. Rajendra Dorian Punji [Co. A. (SB) no 14 of 2007)] Section 72 of the Companies Act, 2013 supersedes the common law of succession and provides the nominee exclusive ownership rights regarding shares after the death of the shareholder.

Harsha Nitin Kokate v. Saraswat Co-operative Bank Limited [2010 Bom 615] the interpretation was that Section 109A of the Companies Act, 1956 (now Section 72 of the Companies Act, 2013), and Bye-Law 9.11 given under the Depositories Act, 1996 is a re-vesting of the shares of the holder in the nominee after the death of the shareholder He entitled to all the rights of the shareholder which none other can have. Legal Heir can’t make any claim unless there any deceased shareholder selected him for the position of the nominee.

The Kokate case creates many doubts. It was considered to be Per Incuriam which means carelessness or lack of due respect to law and fact. In Shakti Yezdani and Anr vs Jayanand Jayant Salgaonkar (1 December 2016), stated that:

• The nominee of securities holder appointed under Section 109A of the Companies Act, 1956 is not authorized to the beneficiary of the securities.
• Nominee’s right to ownership merely by nomination does not supersede against legal heirs, who are entitled to receive the estate of the owner according to the law of succession.

Hence, the High Court held that nomination does not pass over the law concerning testamentary or intestate succession. The provision regarding nomination is made with a purpose to assure that the estate or the rights of the deceased after nomination are protected until the legal representatives of the deceased take relevant actions.

Aruna Oswal vs Pankaj Oswał & Others Civil Appeal No. 9340 of 2019, decided on July 6, 2020) Case further elaborates upon this, the nominee is not authorized to the shares. He is the mere person holding the securities and all the benefits attached to it such as the dividends and voting rights in security, on behalf of the legal heir until the legal heir’s name has been registered in the Company Register.

Exceptions to the Rule

Laws of Insurance– According to Section 39 of the Insurance Act, the nominee is an agent who obtains the money which was unpaid under the life insurance policy and that the money received remains the property of the assured during his lifetime and on his death makes part of his property provided that the law of succession applied.

But, the Legislature ratified the Insurance Law (Amendment) Act, 2015 for changing the previously settled status under the Laws of Insurance mentioned that if a policyholder dies after the maturity of the insurance policy but no benefit provides to him due to his death, in such a circumstance, his nominee shall be authorized to take advantage of his policy.

Regulation 29A of SEBI (Mutual Funds Regulation), 1996 the stock held by the stockholder would confer power in the event of his death in nominee appointed by him.

RBI Master Circular– The Reserve Bank of India Master Circular on Nomination facility for Relief/Savings Bonds mentioned that the holder of a Savings or Relief Bonds can nominate one or more individuals as a nominee, who would be authorized to the Relief/Savings bonds and the interest attached thereon.

Role of Nominee

The Nominee executes his role to protect the rights and benefits of the legal heirs as the custodian. Under the provisions of the insurance act in Sarabati v. Usha Devi (AIR 1984 SC 346), stated that merely Nomination made under Section 39 of the Insurance Act, 1938 does not create any beneficiary interest to the nominee. The amount paid to the nominee not meant for benefit belongs to him and the beneficiary cannot claim the interest as his right. On the death of the policyholder, the amount payable under the policy became part of his estate which was governed by the law of succession. The nominee merely acts as the hand to collect money from the insurer however same may be claimed by legal heirs as per succession law.

In Shipra Sengupta v. Mirdul Sengupta [(2009) 10 SC 680 Even the deceased securities holder power transferred to the Nominee but it subjects to the law of succession. The amount can be received by the nominee but afterward, the amount can be claimed by legal heirs as per succession law.

Shares held in the dematerialized form

If the shares are held in dematerialized form, the nomination is required to be recorded by Depository Participant (DP), Depository Participant is defined as an Agent who deposits the money invested by investors. Also, he acts as an intermediate between the depositories and investors. DP provides 16-Digits Number for accessing the Demat account. DP provides the application form, for opening a new Demat account. Then, there is a section for furnishing the details of the Nominee. In case, the investor hasn’t provided the Nominee details or for changing the name of the Nominee or forgets whether Nominee details provide or not. The Investor may ask for a Client Master Copy from DP. The copy includes all the basic details about the Demat account like Residential Status & Address, Bank Account to which dividend amount is to be provided & Nominee details. The Nominee holding the Demat account is not required to notify the company separately about the death of the Investor.

Now, the Securities and Exchange Board of India (SEBI) has made it compulsory to register the share and other security by opening the Demat account. The objective of this is to ensure safety while transferring securities and to curb any kind of fraudulent or manipulating activities by Anonymous Person.

Conclusion

It is still a conflicting concern between the legal heirs & nominee who will get exclusive ownership rights. However many judgments have considered that the nominee’s role merely is to safeguard the interest of the legal representatives until ownership is claimed by them. The Succession Laws every time supersedes all other laws whenever there is any conflict between the nominee and legal heirs. It is recommended to make a will in expressed form along with making the nomination to avoid any kind of ambiguity in the future. It is also reasonable to make sure that the will is harmonized between the legal heir and nominee. At last, the present position of the nominee is as follows:

• He is merely a custodian of the shares or securities; there isn’t any kind of ownership right attached to it.
• He has to perform its fiduciary duty to protect the membership and share related rights.

Frequently Asked Questions

• What happens to the nomination if I dematerialize the status of shares?

The nomination gets revoked if you choose to dematerialize the shares. A new application for nomination will be required to be filed with your Depository Participant or the company after such dematerialization.

• Can I nominate part of the shares to any person?

No. The nomination must always be made for the entire shareholding under a folio.

• Do I have to send my share certificates along with the nomination form?

No.

• Can there be a single nominee for all other Companies shares held in the Demat account?

Once the nominee details are updated in your Demat account, the person will be the nominee for the shares existing in your Demat account. Thus there is no requirement to individually inform each company of the de-mat account nominee.

• Can the nominee sell the shares without registration in his favor? What is the procedure?

Yes, a nominee can sell the shares to a third party, without registration of shares in his favor. However, the usual procedure for the transfer of shares will have to be followed.

References

1. Legal heir or Nominee? Who is the rightful owner?
2. The nomination of Shares and Rights of Nominees

3. Expectation of inheritance does not override the Nominee’s rights

4. Frequently Asked Questions on Nomination of Shares Nomination of Shares
5. Power to Nominate

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