Nomination of Securities Vs. Succession Law

A. What is the confusion

There is a persistent ambiguity surrounding the entitlements and rights of a Nominee in securities of the Company compared to those of the legal heirs.

Due to the dissimilarities in the Nomination and the rights of the Nominee under different legislation, there remains a misperception of whether such ‘nomination’ bestows absolute ownership over nominees. Further, the judiciary has rendered various scattered judgments, and in instances where this question has arisen repeatedly, the courts have tended to favor the rights of the legal heir.

In the matter of  Harsha Nitin Kokate vs The Saraswat Co-Op. Bank Ltd. & Ors. Ig on 20 April, 2010 (indiankanoon.org) the Hon’ble Bombay High Court held, that Section 109A of the Companies Act, 1956 (hereinafter referred to as “1956 Act”) and Section 9.11 of the Depositories Act, 1996, the intent of the nomination is to vest the property in the shares which include the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed.

The simple solution to this is to find whether the rights accorded to a Nominee under Section 72 (‘S.72’) of the Companies Act, 2013 (‘the Act’) and under the Depositories Act, 1996, can supersede the rights vested in a legal heir according to the general laws of succession. Nonetheless, clarity on this matter remains elusive.

B. What is provided under the Companies Act, 2013 and  the Depositories Act, 1996

Nomination of Securities under the Companies Act, 2013 and the Depositories Act, 1996 is for a limited purpose– Section 72 of the Act (erstwhile Section 109A of the Companies Act, 1956) and Bye-Law 9.11.1 of Depositories Act, 1996 are for a limited purpose empowers a holder of securities to nominate any person in the manner prescribed, to/in whom his securities shall vest in the event of his death. And, in case of joint shareholding the joint holders may together nominate any person to whom all the rights in the securities shall vest in the event of death of all the joint holders.

S.72 of the Act and Depositories Act, 1996 consists of the words ‘vest’, ‘nominee’, and a non-obstante clause which if literally interpreted would render to give the Act and the Depositories Act, 1996, a status of a ‘superwill’ that is bereft of the rigour applicable to a will for its making or the test of its validity under the Indian Succession Act, 1925. The presence of a non-obstante clause would reasonably imply that the effect of nomination under the Act and the Depositories Act, 1996 would vest in the Nominee a complete title of the shares notwithstanding anything contained in the testamentary disposition(s) or nomination(s) made under other laws dealing with securities.

This is further substantiated by the language of Form SH-13 (Nomination Form) of the Act and form under the Depositories Act, 1996, which indicates that all the rights of the holder/joint holders in respect of securities held, upon his/their death, shall vest in the nominee(s). Accordingly, it can be argued that the legislature under the Act intended to give complete ownership to the nominee.

D. What is mentioned under the Constitution of India-

The Act is referable in the Constitution of India (‘COI’) under Entry 43 and/or Entry 44 of List I of Schedule VII which provides for incorporation, regulation, and winding up of Companies. Therefore, the legislation deals with the limited aspects of the birth of a legal entity/company, its management/the affairs of the company, and its death/winding up of the company.

Whereas, the Indian Succession Act, 1925, or other legislations dealing with succession ( Succession Law) relate to Entry 5 in List III of Schedule VII to the COI.

E. Can Nomination supersede Succession Law?

Since the source of the power of both legislations, the Act and the Succession Law is different,  the literal interpretation of S.72 of the Act would end up providing a mode of succession not contemplated by the legislature. Accordingly, in the presence of a law specifically dealing with Succession, the Act cannot be interpreted to provide a mode of Succession or deal with Succession at all.

S.72 of the Act and Depositories Act, 1996 cannot impact the rights of the legal heirs obtained through the application of the Succession Law. Moreover, the Indian Succession Act, 1925 and Succession Law prescribes a detailed judicial process to obtain Letters of Administration or Succession Certificates or Probates as the case may be.

The fundamental focus of Section 72 of the Act (erstwhile Section 109A of the Companies Act, 1956) and Bye-Law 9.11.1 of the Depositories Act, 1996 is not the law of succession nor it is intended to restrict the law of succession in any manner.

Use of the non-obstante clause in Section 72 of the Act serves a singular purpose of allowing the company to vest the shares upon the nominee to the exclusion of any other person, for the purpose of discharge of its liability against diverse claims by the legal heirs of the deceased shareholder. This arrangement is until the legal heirs have settled the affairs of the testator and are ready to register the transmission of shares, by due process of succession law.

E. To stand by decisions and not to disturb what is settled

Supreme Court in its judgment under the Appeal in the matter of Shakti Yezdani & Anr. v/s. Jayanand Jayant Salgaonkar & Ors. (CIVIL APPEAL NO. 7107 OF 2017) 3101_2017_7_1501_49073_Judgement_14-Dec-2023.pdf (sci.gov.in) discussed the Nomination Vs. Succession law.

The discussions in the above-mentioned case law specify that the Companies Act, 1956, and subsequent amendments as parliamentary legislations are rooted in Entry 43 of List I of Schedule VII to the COI, which deals with incorporation, regulation, and winding up of corporations. There is no mention of Nomination and/or Succession in Entry 43 of List I of Schedule VII to the COI or the statement of objects and reasons or any other material about the Companies Act, 1956. The same is also not seen in subsequent amendments to the Companies Act, 1956.

The SC noted that the usual mode of succession is not to be impacted by any nomination. The legal heirs therefore have not been excluded by virtue of nomination.

If Nominee(s) under the Act were to be considered beneficial owner(s) of the securities after the death of the holder/joint holders, the purpose behind the prescription of judicial process for determination of successors’ rights would be defeated and the nominee(s) would be able to claim the securities without verification of the claimants’ rights by the prescribed judicial process.

The object behind the introduction of a nomination facility under the Act and Depositories Act, 1996 has been discussed by the Supreme Court in the above-mentioned judgment which reads that for a limited purpose, the Nomination facility is introduced under the Act and the Depositories Act, 1996 to ensure that there exists no confusion about legal formalities that are to be undertaken upon the death of the holder and by extension, to protect the subject matter of Nomination from any protracted litigation until the legal representatives of the deceased holder are able to take appropriate steps.

In contrast, one must note that ownership of the securities is not granted to the Nominee nor there is any distinct legislative move to revamp the extant position of law, concerning the same.

The value of the securities is subject to market forces and various advantages or benefits keep accruing to the holder of securities viz. allotment of securities, disbursement of dividends, etc. Moreover, a holder of securities is required to be represented in the general meetings of a company.  It is necessary to ensure that commerce does not suffer due to delay on the part of the legal heirs in establishing their rights of succession and then claiming the securities of a company.

Hence, it can be construed that the intent of the Nomination facility is not to grant absolute rights of ownership of securities in favour of the Nominee(s) and restrict the applicability of Succession law, but to provide a legally valid quittance to the company by allowing for the liability to be moved from the company to the Nominee so that the company does not remain answerable forever to Succession litigations and an endless slew of claims under the succession laws.

The Nominee shall continue to hold the securities in a fiduciary capacity and shall be answerable to all claims in the Succession law until the rights of the legal heirs or legal representatives are established. 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 Act as well.

F. Conclusion

In the matter of Shakti Yezdani & Anr. v/s. Jayanand Jayant Salgaonkar & Ors. (CIVIL APPEAL NO. 7107 OF 2017) 3101_2017_7_1501_49073_Judgement_14-Dec-2023.pdf (sci.gov.in) the Supreme Court held that it is beyond the scope of the company’s affairs to facilitate succession planning of the shareholder. Upon a careful perusal of the provisions within the Companies Act, it is clear that it does not deal with the law of succession. Therefore, a departure from this settled position of law is not at all warranted. Nominations under the Act don’t supersede the established laws of inheritance.

The Supreme Court held that a bequest made in a Will executed in accordance with the Indian Succession Act, 1925 in respect of shares or securities of the deceased, supersedes the Nomination made under the provision of S. 109A of Companies Act, 1956 or Section 72 of the Act and Bye-law 9.11 framed under the Depositories Act, 1996. The bench of SC accordingly ruled that an incorrect view was taken in Harsha Nitin Kokate vs The Saraswat Co-Op. Bank Ltd. & Ors. Ig on 20 April, 2010 (indiankanoon.org).

CS Vikas Varma, FCS
Senior Associate,
Amita Desai & Co., Company Secretaries
Mumbai
info@amitadesai.com