Why a nominee should never be an ultimate beneficiary

In a Reserve Bank of India (RBI) advertisement campaign, cricketer K L Rahul says, “Remember to register a nominee”.

“Mutual funds mein nomination karna sahi hai (it’s important to complete your nomination in mutual funds),” says the Association of Mutual Funds in India (AMFI).

These campaigns lay emphasis on nomination and the role of a nominee, in the event of the stakeholder’s demise.

The dictionary meaning of nomination is ‘the act of officially choosing someone to do a particular job or task’. The role of nominee is that of a trustee or guardian or a custodian of the assets. A nominee represents heirs and successors.

There are many judgements regarding the role and responsibilities of nominees towards legitimate heirs and beneficiaries.

Is nominee the same as successor?

Recently, there have been some voices to legally treat nomination as the third route for passing on legacy. These representations are made in the backdrop of two arguments:

· Nominees of all assets must be owners. They should be made legitimate beneficiaries - an Indian Jugaad being most cost-effective and easy; and

· As per the current statutes, inheritance is only possible through a Will or by invoking succession laws applicable to the religion of the deceased during his birth. This being a long-drawn expensive process needs to be shelved, especially since the penetration of the Will is low.

Mountain of unclaimed funds

The basis of this argument is the quantum of unclaimed money -- around Rs 1,59,000 crore (as on Dec 31, 2020. Source: Recoversy.in).

The break-up is as follows: Investor Education and Protection Fund (Rs 28,800 crore), unclaimed mutual funds (Rs 24,000 crore), unclaimed corporate dividends (Rs 5,454 crore), unclaimed amount in PPF accounts (Rs 48,000 crore), unclaimed amount in UTI schemes (Rs 11,700 crore), unclaimed amount in bank accounts (Rs 25, 860 crore) and unclaimed matured insurance policies (Rs 15,166 crore).

The absence of a nominee is one of the reasons for not claiming these amounts. Other reasons include lack of nomination, demise of the nominee prior to the owner, change of address of the owner or nominee, etc.
The quantum of unclaimed amounts does not justify the argument that just because the idle amounts are high, let’s give them to the nominees and be done with.

What do SEBI, RBI rules say?

Post the establishment of the Investor Education and Protection Fund Authority in September 2016, claims for such dividends and shares are routed through a well-settled, system-based process.

The ecosystem, with demat shares being close to 97 percent, and the recent SEBI guidelines of November 3 and December 14, 2021, have initiated action to seek KYC and allied compliances, leading to encouraging results.

The RBI’s master circular, dated June 9, 2005, lays down established claims settlement procedure which are aligned to Sec. 45 ZA to 45 ZF of the Banking Regulation Act, 1949, whereby discharge of claim to a nominee, is part of a well-described process and has to be completed by the banks, and rightly so due to the privity of contract. Post that, it is the responsibility of the nominee to ensure that the money reaches the rightful legal heirs.

Rightfully so, because a bank does not have the bandwidth to establish the authenticity of the Will. The bank, though, identifies the nominee whose name was suggested by the deceased account holder.

By handing the money over to the nominee, the bank, in a way, says: ‘I am handing over the money to you, now it is your job to hand it over to the rightful legal heirs as per what the Will states.’

If the nominee is not an heir or beneficiary as per the Will, he/ she has to hand over the proceeds to the legitimate heirs as per succession laws. The money in accounts which are inoperative for 10 years are transferred to the Depositor Education and Awareness Fund (DEAF).

The rise in DEAF is partly due to the fact that nominees could be non-traceable and/or the addresses of the account holders and nominees have changed or were incorrect.

Insurance claims

In case of insurance claims, the Insurance Regulatory and Development Authority of India (IRDAI) has reported efficiency in processing claims and within remarkable turnaround time, thanks to the crucial role played by Third- Party Administrators (TPAs).

Dangers of nominees being legal heirs

The idea of conferring ownership on the nominee runs a shiver up my spine.
Consider an old retired couple who is being looked after by caregivers/neighbours or close friends. They may have appointed one of them as nominees for their financial assets just for the sake of compliances. However, in a Will, or even according to succession Acts, if their children are the heirs, they would be the beneficiaries.

Here, a nomination is made merely to meet certain administrative requirements. If the nominees become the owners, the children would be left high and dry. If in the above case, the couple wants to donate all their estate to charity or philanthropy, it would not be feasible as institutions/ NGOs and similar entities cannot be registered as nominees.

Such a policy will have serious consequences as it will only invite litigation than facilitate smooth succession.

Moreover, how can one imagine a nominee as the automatic beneficiary for immovable assets? Can there be a different legislation for different asset types for the purposes of legacy?

In summation, it would be draconian to suggest that a nominee must become a beneficiary. A nomination can be an arrangement for succession, and in no manner can a nominee assume the position of a beneficiary or an owner. No arrangement which circumvents the succession route prescribed under law can be permitted.