Introduction
What happens to a person’s shares in a company after they pass away? In earlier times, if a shareholder’s family wanted to claim those shares, they had to navigate a maze of time-consuming and expensive documentation – all to prove their relation to the deceased person as well as their right as legal heirs. To reduce the burden of this complex procedure on legal heirs as well as the companies, the right of nomination was added to the Companies Act, 1956 (‘1956 Act’). This right allowed a shareholder or debenture holder to have their shares or debentures vested in a person of their choice upon the holder’s death. Once such a person was nominated, the company could quickly transmit the shares in the nominee’s name. This acted as a stopgap measure to allow quick and efficient administrative handling of shares or debentures by the company upon the holder’s death.
Later, the Companies Act, 2013 (‘Companies Act’) expanded this right to include all securities rather than just shares and debentures.[1] Thus, any security as defined under the Companies Act can be vested in the nominee’s name after the death of the security holder. But then questions arise – what happens when a nomination is made and a duly executed Will also exists at the same time with respect to the same securities, or when a Will does not include the said securities, or when a person dies intestate? Does the nomination confer automatic rights on the nominee by granting them with the right to receive the securities of the company upon the death of the security holder? Does it mean no one else can claim those securities, regardless of what other legal documents (like a Will) might say?
These are the controversial questions, especially since the provision under the Companies Act contains a non-obstante clause that gives overriding effect to the nomination over any other law and appears to grant absolute rights to the nominee.[2] A plain reading of the provision suggests that no other law, including the laws of succession in India, would affect the rights of the nominee as provided under the Companies Act. Does this mean the nominee must battle it out with the legal heirs? In such cases, the deceased may leave behind a trail of confusion, with family members fighting over the successor to the now-vacant throne. Do the legal heirs stand any chance against the seemingly overriding provisions of the Companies Act? Fortunately, in recent years, this question appears to have been settled in favor of the legal heirs, an issue that this article seeks to explore.
Nomination Under the Companies Act
The Companies Act provides the power of nomination to security holders, as explained above. This right can also be exercised by joint holders of securities, in which case the securities will vest in the nominee upon the death of the last-surviving joint holder.[3]
The nomination is carried out by the security holders by filing Form SH-13 with the company.[4] A nomination can also be canceled or modified by filling Form SH-14.[5] The holders themselves must sign the form – no one else may do so, not even under the power of attorney, for it to be valid. Once a nomination has been made, the nominee may make a claim on the securities upon the death of the holder. The nominee must send a notice to the company to become a registered security holder along with the death certificate of the deceased and any other evidence required by the board of directors of the company.
Nomination v/s Succession
According to the Companies Act, no other law in existence shall override a valid nomination. A nomination can only be cancelled or modified through Form SH-14. Functionally, this suggests that the nominee shall receive full rights over the nominated securities upon the death of the original holder. However, interpreting the provision this way raises significant concerns regarding the applicability of Indian succession laws, especially in cases of testamentary and intestate succession. Recent judicial pronouncements have brought nuance to this issue, clarifying that a nomination does not confer absolute ownership over the securities, but merely facilitates their transfer until rightful claims under succession law are determined. For instance, in the Talwar case[6], the Supreme Court looked at Section 45-ZA of the Banking Regulations Act, 1949, which provides the right of nomination to bank deposit holders, and interpreted it as merely putting the nominee in the shoes of the depositor upon the depositor’s death to receive the deposit amount as a trustee. But it did not make them the actual owner of the money. Similarly, in the case of Usha Devi,[7] the Supreme Court looked at Section 39 of the Insurance Act, 1939 and interpreted it to mean that the nominee chosen under this provision would only receive the amount that would have accrued to the beneficiary under the insurance policy but would not make such nominee the actual beneficiary. The beneficiary would be the legal heirs of the deceased who could claim the insured amount according to the laws of succession.
There are other similar cases related to nominees made under the Employees’ Provident Fund & Miscellaneous Provisions Act, 1952[8] and Government Savings Certificate Act, 1959,[9] where the Supreme Court has held this consistent view on nomination.
These cases were also relied on by the Supreme Court in Shakti Yezdani Case[10], which finally put to rest this dilemma between nomination and succession. The facts of this case concerned a shareholder who died leaving behind a Will which covered his other estates except for mutual funds/shares owned by him. However, he had previously appointed a nominee with respect to the mutual funds/shares which were not included under the Will. In answering this issue, the Supreme Court looked at the objective of this provision under the Statement of Objects and Reasons of the 1956 Act. It was stated that this provision sought to encourage investment by investors in the corporate sector while also aligning with the spirit of liberalization. It would reduce the burden on companies in discharging themselves from the liability of issued securities.
The Court focused on the intent of the legislators, rather than a bare reading of the provisions:
“Reading the provision of nomination within the Companies Act, 1956 with the broadest possible contours, it is not possible to say that the same deals with the matter of succession in any manner. There is no material to show that the intent of the legislature behind introducing a method of nomination through the Companies (Amendment) Act, 1999 was to confer absolute title of ownership of property/shares, on the said nominee.”[11] “Consistent interpretation is given by courts on the question of nomination, i.e., upon the holder’s death, the nominee would not get an absolute title to the subject matter of nomination, and those would apply to the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and the Depositories Act, 1996 as well.”[12]
The meaning of “vest” under Section 109A of the 1956 Act (corresponding to Section 72 of the Companies Act) should not be interpreted to mean absolute ownership but rather should be interpreted in accordance with the objectives of the statute. “Further, the term ‘vesting’ is also used in other contexts such as the Indian Succession Act, 1925 wherein Section 211 vests the deceased’s estate in the administrator or executor, although neither become the owner of the said property but merely hold the same until it is distributed among the lawful successor(s). The term ‘vests’ in Section 109A of the Companies Act 1956 is therefore required to be interpreted along these logical lines.”[13]
The Supreme Court thus held that the securities vested in the nominee are to be held in trust, allowing the issuing company to deal with them smoothly in the immediate aftermath of the holder’s death. This arrangement gives the legal heirs time to settle the deceased’s affairs, after which they may assert their rights over the shares in accordance with succession law. This interpretation helps reconcile the apparent conflict between nomination and succession.
Conclusion
The Supreme Court has consistently held that nomination is not equivalent to testamentary succession. A nominee merely holds the securities in trust for the rightful successors, whether determined by a Will or Indian succession laws. To assert their claim, legal heirs must obtain probate (if a Will exists), a succession certificate, and the death certificate of the deceased, and submit these along with a transmission request to the company to have the shares transferred in their name.
Although this interpretation may appear inconsistent with the plain language of the Companies Act, it is grounded in reason. The Companies Act and the 1956 Act were not intended to govern succession but to regulate corporate functioning. It is, therefore, appropriate that the Court’s reading maintains a practical balance between nomination and succession laws.
Written by Nidhi Arora (Partner) and Aastha Singh (Associate)
*Authors were assisted by Adi Roychowdhury (Intern)
[1] Section 72(1) of Companies Act.
[2] Section 72(3) of Companies Act.
[3] Section 72(2) of Companies Act.
[4] Rule 19(1) of Companies (Share Capital and Debentures) Rules.
[5] Rule 19(9) Companies (Share Capital and Debentures).
[6] Ram Chander Talwar and Ors. v. Devender Kumar Talwar and Ors. (2010) 10 SCC 671.
[7] Sarabati Devi and Ors. v. Usha Devi (1984) 1 SCC 424.
[8] Nozer Gustad Commissariat v. Central Bank of India (1993) 1 Mah LJ 228.
[9] Vishin N. Khanchandani v. Vidya Lachmandas Khanchandani, (2000) 6 SCC 724.
[10] Shakti Yezdani v. Jayanand Jayant Salgaonkar 2016 SCC OnLine Bom 9834.
[11] Ibid, para 23.
[12] Ibid, para 43.
[13] Ibid, para 34.
