Financial Assets and the Rights of Nominees and Successors

(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
[email protected].
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 

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

2 comments

  • Thanks for this useful update. It is an interesting point that the SC judgments which were ignored by Kokate judgement and followed by Salgaonkar are based on interpretation of Insurance Act, which itself has changed.
    One will have to see how Supreme Court settles it.

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