We are in a phase of economic evolution where social security for self and family is largely achieved and shaped by individual financial planning and efforts rather than as a community mechanism, although a small part may be provided by government-backed mechanisms such as the Employees’ Provident Fund, which does not cover the entire population.
Steps need to be taken to ensure that our loved ones receive our assets after our death without delay or confusion. In last week’s edition of this two-part series, we delved into nomination in bank accounts and insurance policies. In this edition, we strive to understand the nomination aspect in stock market investments.
Gone are the days when, even to effect a change of address, an investor had to file documents at each of the companies in which he had investments. Now, with the ease of To dematize In Demat accounts, all the investor needs to do is submit the documents to the depository participant. Once the address change is reflected in the Demat account, it is valid for all the investments held in that Demat account.
The same applies to legal heirs who claim a person’s shares after his death. Filing claims with the depositary ensures that they are applied to all investments held in the demat account.
If a nomination is mentioned, the process of transferring securities to the nominee is simplified: the investor’s death certificate together with the KYC (Know Your Client) of the nominee is sufficient. In the stock market, KYC is also centralized. If the KYC is carried out with a KRA (KYC Registration Agency), it is valid for all stock market participants.
However, if no nomination is made, the requirements like probate, succession certificate, legal heir certificate and no-objection letters from other legal heirs would cause the process to suffer delays of several weeks, if not months, and involve running back and forth between authorities and courts to get the documents. In times of emergency, this can lead to regrettable delays, mental stress and agony.
Role of the nominees
Nominees may be immediate family members of the investor, as is the case with bank accounts and insurance policies. If the nominee is someone other than the person entitled to beneficial ownership of the securities under the laws of wills or succession, the nominee will hold the securities in trust until they pass into the hands of the person entitled to do so.
If the nominee is a minor, a guardian other than the investor must be indicated. An investor may choose up to three nominees and specify the percentage of holdings in the securities for each of them. Once the transfer of securities or mutual fund units to the nominee is made, the obligation of the depositary or the mutual fund is extinguished.
This means that they do not have to worry about whether the candidate is the actual legal heir and they should not interfere. This is what simplifies the process, but it also involves careful selection of the candidate.
In a circular issued in July 2021, the Securities and Exchange Board of India (Sebi) had mandated election of nominations in demat accounts held by individuals, with the consequence of freezing the demat accounts if nominations are made by the end of March 2022. A similar mandate was issued in June 2022 with respect to mutual fund holdings, failing which mutual fund holdings would be frozen on a debit basis by the end of March 2023.
Subsequently, Sebi issued circulars extending the last dates for compliance with the mandate. In June 2024, based on representations received from market participants, Sebi decided that demat accounts or mutual fund folios without nomination would not be frozen. Accordingly, if the ‘nomination election’ is not made, investors will not be disqualified from receiving dividends, interest or redemption payments, as the case may be, on their holdings or from making service requests or filing complaints.
Payments held back only for non-choice of nomination as per the earlier circulars will be processed and released to investors. However, in case of new demat accounts and mutual fund folios, nominations will be insisted upon as per the earlier circulars.
While nomination is not currently mandatory for existing demat accounts or mutual fund folios, it is a sensible and urgent step to secure the future of the family, ensuring that they are provided with the means to be self-reliant no matter the circumstances.
Usha Ganapathy Subramanian, Practicing Company Secretary, Chennai
Ranjith Krishnan, Sustainability Consultant from Thane
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