A 20th April judgement of the Bombay High Court has overturned established practice in the matter of transmission of shares by giving all ownership rights to the nominee rather than the legal heirs.

This means that anyone who has nominated persons other than their chosen or legal heirs in their demat accounts would do well to make appropriate changes.

In the verdict, Justice Roshan Dalvi struck down a petition filed by Harsha Nitin Kokate, who was seeking permission to sell some shares held by her late husband. The Court noted that as she was not the nominee, she had no ownership rights over the shares.

Ms Kokate’s lawyer had argued that as she was the heir of her husband who had died intestate (without a will), she should have ownership rights of the shares, and be able to do anything with them as she wished. In this case, Ms Kokate’s husband had nominated his nephew in favour of the shares.

Ms Kokate’s lawyer went on to claim that the nominee had no legal ownership rights over shares, and was merely entitled to hold the shares in trust for the estate of the deceased. He pointed out similar cases under the Insurance Act with respect to life insurance where although the policy is paid to the nominee of the deceased policy holder, it is only held by them in trust for the estate, as the Act provides no other provision for any other rights of the nominee. He also pointed out that under the Maharashtra Co-operative Societies Act, while the shares in the society are transferred to the nominee, it does not result in the flat being transferred to the nominee. He again acts as a trustee for the estate of the deceased and the society is not concerned with any disputes between the heirs over the property.

Justice Dalvi however noted that under the provisions of the Companies Act and the Depositories Act, Acts which govern the transfer of shares, the role of a nominee was different.

“A reading of Section 109(A) of the Companies Act and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed, as has been done in this case.”

This excerpt from the judgement makes it clear that since the nomination was done in the proper and prescribed manner, the nomination was valid, and the nominee was entitled to ownership rights of the shares, to the exclusion of the legal heir.

“The Court has reemphasised and clarified the position in law both in regard to nomination as far as shares in companies, as well as nomination as under the Maharashtra Co-operative Societies Act which has an analogous provision, and therefore the ambiguity that used to exist in the minds of legal descendents should now be put to rest,” said Advocate Jamshed Mistry of the Bombay High Court.

“In light of this judgement, it would be prudent for legal descendents to get themselves nominated rather than wait for the law to take its course, in which case the person who has been nominated will get the shares,” said Advocate Dipesh Siroya of the Bombay High Court.

Ms Kokate can now appeal to the Supreme Court, and if the apex court delivers a contradicting judgement, the High Court’s judgment will be null and void.

The notice of motion was No. 2351 of 2008, in suit No. 1972 of 2008
AK Maheshwari had appeared for Ms Kokate, while Shyama Parkar and HS Shreepad Murthy appeared on behalf of the defendants.