(The following guest post is authored by Sumit Agrawal, who is an Assistant Legal Advisor, Securities and Exchange Board of India at its Head Office in Mumbai. He can be contacted at firstname.lastname@example.org. Views are personal.)
There is a frequent debate as to who will own an investor’s assets (shares and debentures, life insurance, provident fund and gratuity account, PPF, saving account, fixed deposit/recurring deposit account, government savings account, etc.) upon the death of such investor — the nominee or the legal heir?
In the year 2010, in Harsha Nitin Kokate v. The Saraswat Cooperative Bank (hereinafter “Kokate Judgement”) the Bombay High Court was dealing with right of a nominee versus right of a legal heir in the context of securities while analyzing Section 109A of the Companies Act, 1956 read with Bye Law 9.11 of the NSDL Bye Laws. It had held that intent of nomination is to vest property in shares, which includes ownership rights thereunder in nominee upon nomination validly made as per procedure prescribed.
Therefore, it was held that if procedure prescribed by law for nomination is followed, the nominee would become entitled to all rights in shares to exclusion of all other persons. Accordingly, upon nomination, the nominee would be made beneficial owner and, therefore, all rights incidental to ownership would follow which would include right to transfer shares, pledge shares or hold shares.
For a detailed discussion on Kokate judgement, please see here.
Recently in the matter of Jayanand Jayant Salgaonkar vs. Jayshree Jayant Salgaonkar (2015) (hereinafter “Salgaonkar Judgement”), the Bombay High Court has declared the Kokate Judgement to be per incuriam, and has held that legal heirs and not the nominees will obtain the ownership rights of share certificates. After a detailed analysis of various judgments, it held that a nomination only provides the company or the depository a quittance. The nominee continues to hold the securities in trust and as a fiduciary for the claimants under the succession law. Nominations under Sections 109A and 109B of the Companies Act, 1956 and Bye-Law 9.11 made under Depositories Act, 1996 cannot and do not displace the law of succession. The court also observed that in the Kokate Judgement it had failed to consider many binding judgments of the Supreme Court including the judgment of Sarbati Devi v Smt. Usha Devi (AIR 1984 SC 346).
Therefore, the rights of a nominee to shares of a company cannot override the rights of legal heirs of deceased and therefore the amount received by the nominee can be claimed by the legal heirs of the deceased.
In the context of securities law, the Salgaonkar judgement is a welcome decision as it resets the balance which was upset by Kokate Judgement. It will also set at rest the frequent controversy whenever a third person, who is not a successor, is nominated for shares and debentures.
However, it is not yet conclusive whether this judgment delivered in the context of securities can be considered to be a law for nominations under laws governing other assets, more so because of the divergent language used in the special statutes governing such assets. For example, in the context of insurance policies it is not conclusive in view of Insurance Laws (Amendment) Act, 2015.
Sections 38 and 39 of the Insurance Act, 1938 as amended by Insurance Laws (Amendment) Act, 2015 have introduced the concept of a beneficial nominee. It limits the beneficial nominees restricted to immediate family members such as spouse, parents and children so that the money secured by the policy shall be paid to the nominee in the event of the death of a policyholder. Therefore, if an immediate family member such as spouse is made the nominee, then the death benefit under the insurance policy will be paid to that nominee, and other legal heirs will not have a claim on the money.
In view of this, it is arguable that under insurance policies, beneficial nominee’s rights excludes all others’ rights, irrespective of any provision in succession law or other law or even a provision in the will unless it is proved that the policy holder could not have conferred any beneficial title on the nominee. Therefore, how rights of legal heirs would be interpreted vis-à-vis Insurance Act, 1938 remains an issue despite the Salgaonkar Judgement.
- Sumit Agrawal