Why Sebi’s new regulation to report investor demise is 'gamechanging'

Provisions have been made for instances where death certificates cannot be obtained.

A son who was unaware that his mother had been investing in a growth fund for decades, and had left him two funds worth Rs 1 crore each, is a good illustration and a real-world example of why many consider a new regulation from the Securities and Exchange Board of India (Sebi) “gamechanging”.

On October 3, Sebi introduced a centralised mechanism for verifying and reporting the demise of an investor to “smoothen the process of transmission in the securities market”.

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Under the new mechanism, when regulated entities such as stockbrokers, mutual fund houses and portfolio managers are informed about the demise of an investor, they will have to obtain the necessary documents from the notifier, verify the death certificate and alert one of the KYC Registration Agencies (KRAs), which will then verify this independently and alert other intermediaries. The other intermediaries then have to reach out to nominees and inform them about what has to be done to make their claim. All of this has a set deadline, so that the process does not drag on forever.

Provisions have been made for instances where death certificates cannot be obtained.

Rajat Dutta, founder and initiator of Inheritance Needs, who has been actively following the regulator, is quite effusive in his praise for this regulation.

He said, “Sebi has shown empathy and addressed the apathy shown towards bereaved families (by some market intermediaries) and attempted to ease their woes of being harassed.”

Dutta should know, he has been an inheritance-enabling services for seven years. As he puts it, he “simulates the death of a living person” to ensure that their loved ones are not burdened with financial challenges while dealing with a tragic loss.

According to him, such regulation is crucial in a country like India where “ninety percent” of people do not discuss their investments with their loved ones. “Whenever they attempt to, their loved ones are not ready to discuss the inevitable and cut short the conversation,” he said. Therefore, the family of a deceased is largely unaware of the investments the person has made.

Harsh Roongta, who founded Fee-Only Investment Advisors and is one of the directors of the Association of Registered Investment Advisors (ARIA), has called this new regulation transformative and “path breaking”. ARIA had provided inputs for this regulation.

Regulatory advantage 

The son’s example given above is an anonymised story of the client of an investment advisor. The son had moved abroad when he was young and took his mother there later when she was ageing. Before her move, she had invested in a growth fund, which came without dividends, and therefore communication from the fund house was rare and half-yearly at most, and the letters were being sent to her India address. After she passed away, her son, who had by then crossed 70 years, asked his uncle to settle the financial matters in India. It was when the uncle went to the house that he saw the piled up letters and discovered the growth-fund investments, which had accumulated to over Rs 1 crore each.

This would play out differently with the new regulation. Under it, when the son alerts one fund manager or any registered service provider about his mother’s death, the others would be alerted automatically, and they will get in touch with the son on their own and encourage him to process the settlement. This means that the fund houses of the two growth funds would have reached out to him, even if his uncle hadn’t happened to come by the letters in their unoccupied house.

Besides the investors, the regulation also helps Portfolio Management Services (PMS-es) because they function using the Power of Attorney granted to them by the client. But this ceases to be valid on the demise of their client. Therefore, if they take transactions on behalf of a deceased client, the managers can be exposed to prosecution.

However, if the client’s family does not alert them, the managers will be alerted of the client’s demise by the other stakeholders.

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The fixes needed 

There are still some wrinkles that need to be ironed out, according to investment advisors.

ARIA’s Roongta wishes several of their other suggestions were included too, such as providing for successive nominations, where a nominee of a nominee could avail of the same benefits; and having the centralised mechanism for the entire financial markets including banks, insurance companies, Employees’ Provident Fund Organisation (EPFO) and so on.

Dutta wishes this mechanism could be extended to nominees too. That is, the holder of the investment could be a nominee for another investment, and the same reporting mechanism could be triggered for both. “Technologically it would be a mere extension of the same process,” he said.

He said that, in many cases, unreported demise of a nominee makes the situation complex on death of the holder of the investment.

Dutta also pointed out the lack of clarity on the submission of death certificates as the primary document, especially whether a notorised photocopy or original the death certificate, issued by a hospital administration overseas would be considered. Currently, subject to interpretation, it’s unclear whether these two documents can be certified by an Indian Notary or whether they will need to be certified by the Notary overseas (or the country issuing the death certificate).

He said, “This clarity is required especially as death certificates issued by overseas authorities do not have a QR Code for website verification but have a barcode (for unique identification)”.

The barcode cannot be read by the verifying authorities who are the registered entities here, and therefore the authorities end up rejecting the documents, even if they are notarised in India.