In his column in the Business Standard, guest contributor Somasekhar Sundaresan analyzes a recent judgment of the Bombay High Court that establishes the superiority of the nomination process over succession (whether testamentary or otherwise) in respect of shares of a company. He observes:
The law on nomination of shares held in companies has taken a new meaning with perhaps the first interpretation of the provisions governing nomination in the Companies Act, 1956 by the Bombay high court.
Interpreting Section 109A of the Companies Act, the court has ruled that the rights of a nominee to shares of a company would override the rights of heirs to whom property may be bequeathed. In other words, what one writes in one’s will would have no meaning if one has made a nomination on the shares in favour of someone other than the heir mentioned in the will.
So far, the law on nomination has consistently been understood to be the law laid down by the Supreme Court in the case of insurance proceeds – that although the insurance company would pay the amounts due on death to the nominee, such amount could be claimed by the heirs to whom property of the deceased has been bequeathed.
The Bombay high court has differentiated from the Supreme Court’s opinion citing a difference in the language of applicable law. Section 109A of the Companies Act provides that upon the death of a shareholder, the shares would “vest” in the nominee. The provision adds that the nominee shall become entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. Therefore, regardless of what is stated in privately executed wills, a company would have to only deal with the nominee as a person now exercising the rights of the deceased shareholder.
He then goes on to discuss some variations (that arguably lead to complexities) in nomination system under the Depositories Act and regulations and byelaws issued thereunder. He concludes:
Shareholders will now have to be alert to changing their nominations every time they change their will. In any case, they would be unable to make different nominations for different securities held in the same demat account.The judgement presents an immediate and urgent agenda item for investor education on the law governing succession and nomination.
Although there continue to be some lingering complications as set out above, the judgment is important for emphatically stating that the nomination process would override any title or interest of legal heirs.