MC Explains: Why SC ruled that nominees cannot claim ownership of securities

SC's judgment on nominees Vs successors

India’s Supreme Court ruled on December 14 that claims over financial instruments such as shares and debentures should be with the successor as laid down by the law or the will of the original owner, and not with nominees.

“The judgment brings clarity to the issue of nominee with respect to securities by authoritatively stating that the nominee is a mere estate manager till the issue of succession culminates,” said lawyer Rohit Anil Rathi, who appeared in the case for the successors.

The court ruled that a nominee in a share/debenture certificate is not entitled to inherit it by default. The inheritance or the succession of these instruments will be determined by the contents of the deceased's will or as per succession laws.

Succession in India is determined by the will written by the owner or by laws such as the Hindu Succession Act and the Indian Succession Act. The transfer of securities comes under the Companies Act of 2013 and the Depositories Act of 1996. The provisions related to transfers and nominations in the Companies Act of 2013 are similar to those in the Companies Act of 1956.

“It is clear now that the nominee would only stand in the capacity of a fiduciary (a person who manages the property) who holds the securities/shares in trust for the legal heirs and is answerable to all claims under succession law,” said Tahira Karanjawala, a partner at law firm Karanjawala & Co.

Moneycontrol explains what the judgment is about, how it reached the Supreme Court, and what laws were considered by the court

Nominee vs legal heir

In this case, a family patriarch executed a will in 2011, making provisions for successors to inherit his estates. The patriarch also had mutual fund investments of over Rs 3 crore for which nominees had been designated. The patriarch passed away in 2013 and his legal heirs began executing the will.

The nominees contended that the MF investment would vest with them automatically, as per the Companies Act, 1956, and the Depositories Act, 1996.

However, a single judge of the Bombay high court refused to entertain the plea of the nominees and held that the focus of the provisions of the Companies Act and the Depositories Act was not the law of succession and neither were they intended to restrict the law of succession in any manner.

A two-judge bench of the Bombay high court also upheld the view of the single judge and held that nominees are appointed to ensure that the instruments are protected until the legal heirs or legal representatives of the deceased take appropriate steps to claim their rights over it.

The high court concluded that provisions related to nomination do not have precedence over the law in relation to testamentary or intestate succession (succession without will).

Supreme Court judgment

The issue ultimately reached the Supreme Court, which held that the vesting of securities in favour of the nominee contemplated under the Companies Act and the Depositories Act was for a limited purpose – to ensure there is no confusion pertaining to the legal formalities to be undertaken upon the death of the holder until the legal representatives of the deceased are able to take appropriate steps.

“The recent judgment of the Supreme Court reiterates that a ‘nominee’ is not the owner of the asset(s) of the deceased but rather holds the asset(s) for the benefit of the legal heirs till such time they are able to establish their right over the asset(s) as per succession laws,” said Dinesh Pednekar, a partner at Economic Laws Practice.

Lawyer Sashank Agarwal noted the SC clarified the distinction between a legal heir and a nominee from the perspective of securities under the Companies Act.

According to the SC, “The object of introduction of nomination facility in the company law was only to provide an impetus to the investment climate and ease the cumbersome process of obtaining various letters of succession from different authorities upon the shareholder’s death.”

Sameer Jain, managing partner at PSL Advocates & Solicitors, said, “A nominee is only a caretaker of the money or security till such time the legal heir, either nominated in the will or as per the succession, claims the same.”

He noted that SC’s decision reiterated the law in this regard and held that a nominee only holds the property in trust for the rightful owner, who after the death, is a successor.

The SC also clarified that the nomination process does not override the succession laws and that the provisions of the Companies Act and the Depositories Act do not create a third mode of succession (other than will and succession laws).

“Today, the shares and securities of a deceased person often constitute a major asset in the estate and this decision by the Supreme Court clarifying the legal position is a welcome one that will help smoothen the process of distribution of the estate of a deceased,” Karanjawala said.