Many readers of Moneylife will be familiar with the importance of nominations and/or wills, as well as the potential consequences of neglecting to make one. Share market and mutual fund investors are likely to receive frequent SMS reminders to submit their nominations by specified deadlines, or risk having their accounts frozen.
The Securities and Exchange Board of India (SEBI), India’s market regulator, has extended the deadline to 30th June for submitting or opting out of nominations. On 2 February 2024, it released a 16-page consultation paper (
Read) proposing revisions to nomination facilities in the Indian securities market, aimed at reducing unclaimed assets and streamlining the process for survivors, beneficiaries and successors of deceased investors.
The proposed changes will cover all types of securities held in a demat account and mutual fund units held in a non-materialised form/ statement of account. SEBI seeks to introduce ease and uniformity in nomination facilities without affecting existing provisions governing transmission and succession. Three key provisions include:
● Rule of survivorship (for joint ownership or holdings)
- Upon the death of any joint-holder of a demat account or mutual fund units, the rights, title and interest will pass to the surviving joint-holders/owners.
● In cases where a Will is present
- The Will must outline asset distribution and name an executor to administer the estate before distribution occurs. While executors hold this authority, a judicial process called 'probate' is required to confirm a will’s authenticity.
(Concerns remain over unreasonable charges and lengthy probate processes. If a Will is signed by a witness and doctor certifying the testator's sound mind, why is this process mandatory? This may create unnecessary obstacles for legal heirs.)
● When an individual dies without a Will (i.e. intestate)
- The court appoints an administrator on application from an interested party. This also occurs if a Will is invalid, an executor is not named, or if the named executor cannot or will not fulfil his/her duties.
Acting on a Will is crucial; however, if the court detects fraud or undue influence, it may deem the will invalid. A letter of administration, issued by the court, empowers the administrator to manage the deceased's estate.
SEBI has disclosed pertinent nomination information in table I, separately addressing mutual funds and demat accounts in both single and joint holdings. Notably, single-holding mutual fund folios with nominations stand at 85.82%, while demat accounts are a mere 27.52%. The combined percentages of 'opted out' and 'no nomination' are 14.18 and 72.48, respectively – a shocking revelation. Conversely, joint holdings display consistency in nomination availability and 'opted out'/ 'no nomination' figures for mutual fund folios and demat accounts.
The paper clarifies that mutual fund units held digitally or physically can be dematerialised. Shareholders possessing physical shares of listed entities established under parliamentary Acts can access the nomination facility by dematerialising their shares, as seen with nationalised banks, insurance companies, and electricity firms.
Chapter four outlines general rules, guardrails, and additional measures for demat accounts and non-materialised mutual fund units.
General Rules -
1. Joint accounts maintain the rule of survivorship; upon one holder's death, rights transfer to surviving holders who can retain or change nominations without affecting operations.
2. If all joint holders/ owners simultaneously pass away, the right, title and interest to the demat account or mutual fund units will be transferred to the nominee/s.
3. On the death of the karta of a Hindu undivided family, the new karta, as constituted under applicable law, would be entitled to operate such an account or transact in such units.
4. On death of the sole account holder/ owner, the right, title and interest to the demat account or mutual fund units will be transferred to the nominee/s.
5. Death of a nominee when the investor is alive, shall not entitle the legal heir/s or legal representative/s of such deceased nominee to any right, title or interest in the demat account or mutual fund units of the investor upon the investor’s death.
6. Where more than one nominee has been specified, upon the death of any one of them before the death of the investor, and where no successive nominee has been specified, then on the investor’s death, the right, title and interest in the demat account or mutual fund units will be transferred to the surviving nominees. For this, the depository and mutual fund house will take the following steps –
A) equal division among surviving nominees irrespective of any specified percentage;
OR
B) division on a proportionate basis among the surviving nominees in the proportion of their original percentages as specified by the investor, (incorporating the portion attributable to deceased nominee).
7. If the investor has availed any credit facilities against demat holdings or mutual fund units a due discharge from the lenders is required.
8. Nominations will remain optional for the investors. However, a single holder desiring to opt out of nomination should expressly declare so. (It is necessary to make aware the investor of the consequences of opting out of the nomination.)
Guardrails and additional measures -
SEBI proposes certain measures for ease in making, changing or cancelling nominations in a secured, convenient and reliable way. Some of them are highlighted below in short.
Proper authentication by the investor while registering, adding, or changing nominees.
Nomination may be made, changed or cancelled at any time for any number of times.
SEBI proposes to increase the maximum number of nominees from the present three to as high as 999 to address the ordinary requirements of individual investors.
Death of nominee/s before investor.
Rights of two or more nominees.
Appointing a guardian for a minor nominee.
Successive nomination in case of death of the nominee/s before the investor.
KYC compliance/ updation of nominee/ s.
Option to the investor to specify rights of the nominee in case the investor temporarily or permanently becomes incapacitated.
Transfer to the nominee will be based on due compliance of KYC and due discharge by creditors if any facility is taken against the financial assets by the investor.
No other documentation including affidavits, indemnities, undertakings, attestations or notarizations shall be required from the nominee/s. No claims in respect of such transfer shall subsist against the depositories or the mutual funds or their registrars, and any claim or contestation shall be among the nominee/s and the claimants without reference to the depositories or the mutual funds or their registrars.
Chapter five of the paper widely explains the measures required to be taken by various entities for the smooth transfer of the financial assets.
SEBI has taken due cognizance of the succession rules in this paper. At many places it has specifically said the following: “As such, the Will and testament of the sole holder / sole owner who perished or his/her legal heir/s or legal representative/s as per the rules of intestate succession shall continue to govern the transmission and succession.”
The
consultation paper contains a format for public comments and annexure A provides a list of SEBI circulars on nomination.
The paper would have been more useful if SEBI had provided illustrations to avoid confusion with regard to some points.
It is to be hoped that this paper will be converted into clear directives, since it can potentially ease the process of transfer of financial assets to nominees and heirs.
(Retired banker Abhay Datar is a consumer activist and an expert counsellor at Moneylife Foundation. He was a member of the Managing Committee of Mumbai Grahak Panchayat (MGP) and also the treasurer at MGP for over two and a half years. After working at Bank of Baroda for 29 years, he retired as IT Manager. Mr Datar has resolved many cases related to banking and has also handled cases related to insurance and mediclaim.)
