Impact of Nomination v/s Will in case of shares held in Indian Companies -By Sanjay Buch, Advocate & Solicitor

The famous English saying where there is a willthere is a way... is, in fact, distinguishable in the legal world as there are complicated (and not simple) ways to get property, when there is a Will... The current topic under consideration is not only one of academic interest but is one which has far reaching implications in the realm of practical affairs. The following illustration will clarify the practical relevance of this topic. X nominates his son Y as a nominee of his shares by way of a nomination form and also makes a Will where he bequeaths those shares to his daughter Z intending thereby that she becomes the owner of the shares after his death. Now contemplate a situation where X dies and Y and Z get embroiled in a tussle over the right to the shares. In such an event the critical question that arises for consideration is who has a better title to the shares Y or Z? In other words, would the nomination made by X gain precedence over his Will or would it be vice versa? This article attempts to answer this tricky question by analyzing the concept of transmission of shares by nomination and by Will and also suggests the favorable mode of transmission of shares after examining the law on the point and the catena of case laws on the subject. Meaning of Transmission: At the outset, it becomes extremely vital to understand the concept of transmission of shares in contradistinction to the concept of transfer of shares. Transmission means passing of property in shares, other than by way of transfer, by operation of law consequent to the death or insolvency of the member (i.e. the beneficial owner of the shares)1. Essentially, transmission refers to devolution of title to shares otherwise than by transfer2. The concept of transfer of shares under the Companies Act 1956 connotes a transfer from one living person to another i.e. inter vivos transfer3. Thus, while death or insolvency of the shareholder is a pre-condition for a transmission to take effect, a transfer necessarily requires to be effected during the lifetime of the shareholder. Transmission of physical shares by Nomination:

Secretarial Standard-6 (SS-6) on Transmission of Shares and Debentures, Issued by the Institute of Company Secretaries of India (ICSI) dated September, 2007, available at http:// www. icsi. edu/ WebModules/ Publications/SSONTRANSMISSIONOFSHARES(SS6).pdf, (last visited on 5th September, 2011) 2 Ibid. 3 Dr. K.R. Chandrarte, Bipin S Acharya, et. al., SEBI Compendium (A guide to listed companies) 843 (Bharat Law House, New Delhi, 4th Edition, 2010)

A. Meaning of nomination: To nominate means to name, designate or specify4. Nomination means the act of nominating a person and nominee means a person named by another (the nominator) to act on his behalf5. Nominee means an individual named in accordance with the Companies Act 1956 by a shareholder(s) whose shares should vest in such an individual on the death of the shareholder(s) and that individual need not be a legal heir6. B. Law relating to the nomination of shares: The law relating to nomination of shares is contained in sections 109A and 109B of the Companies Act, 1956 which was inserted by virtue of the Companies (Amendment) Act, 1999 in order to provide for nomination facility to the holders of shares, debentures and fixed deposit holders. Explaining the rational for the insertion of the provisions relating to nomination within the framework of the Companies Act 1956, the erstwhile Department of Company Affairs vide a PIB Press Release dated 23/07/1999 made the following interesting observations: Earlier, holders of shares and debentures in a company did not enjoy the nomination facility for their shares, debentures and deposits which caused hardships to them. They were required to obtain a letter of succession from the competent authority. The facility of nomination is intended to make the company law in tune with the present day economic policies of liberalization and deregulation. This is also intended to promote investors confidence in capital market and to promote the climate for intercorporate investment in the country. According to section 109 A (1) of the Companies Act, every holder of shares in any company may, at any time, nominate a person to whom his shares in the company shall vest in the event of his death, in the manner prescribed under the Companies Act, 1956. The use of the word may in section 109A indicates that the nomination facility is purely optional and an individual can decide whether or not he shall avail of it. C. Eligibility for nomination: At the outset, it is important to clarify that nomination can be made in respect of both fully paid up as well as partly paid shares7. The crucial question which arises for consideration is who is eligible to be a nominator and a nominee?
4 5

Ibid., at 833 Ibid. 6 Supra Note 1 7 Supra Note 3, at 834

It becomes pertinent to note that nominations can be made only by individuals holding shares on their own behalf8. Non-individuals including society, trust, body corporate, firm, karta of Hindu Undivided Family and holder of power of attorney cannot nominate 9. If the shares are held jointly, all joint holders may nominate10. Essentially, nomination can be in respect of shares held by persons in their individual capacity and not in any representative capacity. Likewise, only individuals (including minors) and not non-individuals can be nominees11. In short, both the nominator and nominee are required to be natural persons acting in their individual capacity. D. Procedure for nomination: A shareholder can make a nomination by filling up Form 2B signed singly if the nominator is the sole shareholder and in case the nominators are joint holders, all the joint holders shall be required to sign the nomination form12. The nomination form is also required to be signed by two witnesses13. The nomination form should be filed in duplicate with the company or Registrar and share transfer agents of the company who will return one copy thereof to the shareholder 14. The nominator may also provide the model signature of the nominee along with Form 2B to facilitate identification of the nominee by the company15. While filling the nomination form the shareholder must be mindful of one basic principle that the nomination will hold good for only those shares, the distinctive numbers of which are filled in the nomination form, and if the nominator purchases or acquires further shares, he will have to make a fresh nomination in respect of the additional shares by submitting a fresh Form 2B as the existing nomination does not automatically cover the additional shares16. When the company receives the nomination form, it checks whether the nomination form is in order and whether the signature of the nominator or nominators matches with that in the records of the company17. Subsequently, the company will enter the fact of nomination in the register of members or in a separate register kept for that purpose and inform the nominator of the registration of nomination in the records of the company18. E. Variation and cancellation of nomination: There may arise a situation where the shareholder may reconsider his decision to appoint a person as a nominee. In such an event, the critical question is - whether the shareholder can effect a change in his nomination? As such, there is nothing in the Companies Act to suggest that
8 9

Form 2B in Companies (Central Governments) General Rules and Forms, 1956 Ibid. 10 Ibid. 11 Ibid. 12 Ibid. 13 Ibid. 14 Ibid. 15 Supra Note 3, at 836 16 Supra Note 3, at 838 17 Supra Note 3, at 836 18 Ibid.

a nomination once made cannot be changed. In fact, a shareholder can change the nomination as and when he so desires by a letter revoking his old nomination and by submitting another Form 2B for change in nomination19. As far as the cancellation of nomination is concerned, it is pertinent to note that nomination stands rescinded and becomes inoperative upon transfer of shares by the nominator during his lifetime20. F. Procedure for transmission: From the point of view of the nominee it is important to note that generally the only formality which is prescribed under the law to effect a transmission of shares in his name on the death of the nominator is that a notice in writing has to be delivered to the company stating that he desires to have himself registered as a holder of the shares accompanied by the death certificate of the deceased shareholder and the original share certificates21. G. Rights of a nominee: As per sub-sections (3) and (4) of section 109B, the nominee shall step into the shoes of the deceased member and will enjoy all the rights and privileges of the deceased member and shall be subject to all his limitations and obligations with respect to the shares. The nominee of a shareholder is entitled to get himself registered as a member or to transfer the inherited shares in the same manner as the deceased shareholder could have22. Likewise, the nominee shall be entitled to dividend and other benefits (except voting rights in meetings of the company) before being registered as a member23. However, careful attention should be paid to the fact that if the company has issued a notice to the nominee to elect and no election either to transfer or hold the shares in his name is made within a period of 90 days, the Board of the company has the right to withhold payments of the dividends, bonus or other moneys payable in respect of the shares until the requirements of the notice have been complied with24. Transmission of physical shares by Will : A. Meaning of Will: Will means the legal declaration of the intention of a testator with respect to his property which he desires to be carried into effect after his death25.

19 20

Supra Note 3, at 838 Ibid. 21 Supra Note 1 22 Section 109(B)(1) of the Companies Act, 1956 23 Section 109(B)(4) of the Companies Act, 1956 24 Ibid. 25 Section 2(h) of the Indian Succession Act, 1925

B. Law relating to Wills: The Indian Succession Act 1925 applies to all Will s made by Hindus, Buddhists, Sikhs, Jains, Parsis and Christians subject to certain restrictions 26. However, the Indian Succession Act 1925 does not apply to Muslims as they are largely covered by Muslim Personal Law 27. C. Eligibility to make a Will: Any person who has completed 18 years of age and who is of sound mind can dispose of his property by making a Will28. D. Procedure for making a Will for transmission of shares: It is pertinent to note that a Will or any other testamentary document does not require the use of any special or technical words but the wording of the Will must be such that the intention of the maker of the Will (i.e. the testator) can be known therefrom 29. Thus, the testator has to insert a clause in the Will to the effect that he desires to bequeath his shares of a certain description to the person of his choice (legatee) in express words. However, the Will must be signed by the testator or by some other person in his presence and by his direction or the testators mark should be affixed to the Will30. Moreover, the Will is required to be attested by two or more witnesses31. E. Alteration or revocation of a Will: A Will may be revoked or altered by the maker of it at any time before he dies32. F. Procedure for transmission of shares by Will: Generally, transmission of Shares will be effected by the company on receipt of intimation of death of a Member and on production of necessary documents, such as i. ii. iii. iv. v. Death certificate; Request for transmission signed by the /claimant(s) with their specimen signature(s); Letters of Administration or Probate of Will ; Original share certificate(s); Orders of the Court or of competent authority, if applicable; legal heir(s) / Legal Representatives

26 27

Section 57 of the Indian Succession Act, 1925 Section 58 of the Indian Succession Act, 1925 28 Section 59 of the Indian Succession Act, 1925 29 Section 74 of the Indian Succession Act, 1925 30 Section 63 of the Indian Succession Act, 1925 31 Ibid. 32 Section 62 of the Indian Succession Act, 1925

vi.

Permission under the Foreign Exchange Management Act, 2000, if applicable33.

The company may require documentary evidence to prove the identity of the legal heir or other claimants, such as PAN Card, Passport, Ration Card, Voters Identity Card, etc34. However, to facilitate transmission of shares in appropriate cases, the company may waive production of certain documents, such as Probate or Letters of Administration. However, in such cases, the company may insist on a suitable Indemnity and affidavit35. G. Rights of the legatee: Upon transmission of shares, the person to whom the shares are transmitted becomes the registered shareholder of the company and is entitled to all rights and subject to all liabilities attached to the shares36. Transmission of shares held in a depository: It is common knowledge that after the enactment of the Depositories Act 1996, shares can be held by depositors in dematerialized form. If shares are held in electronic form, the names of the concerned Depositories i.e. either NSDL or CDSL are entered in the register of members of the company37. Individual shareholders are given an option of nomination at the time of opening the demat account38. The nomination form duly filled-in should be submitted to the Depository Participant (DP) either at the time of account opening or later. In the case of shares held in NSDL, the account holder, nominee and two witnesses will be required to sign the nomination form and the name, address and photograph of the nominee will be required to be submitted which if found valid in all respects and accepted by the DP, shall be registered by the DP by generating a Nomination Registration Number (NRN)39. Generally, for the purpose of transmission of shares, the nominee has to simply send a request in writing to the DP to transmit the shares in the nominees name and submit a duly filled-in transmission form, notarized copy of death certificate and an affidavit in the prescribed format40. However, if a nomination is not made, apart from the submission of a request in writing to the DP, notarized copy of death certificate and transmission form, the necessity of producing documents like Probate, Letters of Administration and other documents, as may be required by the concerned DP, arises 41. However, where the market value of securities to be transmitted is
33 34

Supra Note 1 Ibid. 35 Ibid. 36 Supra Note 1 37 Supra Note 3, at 836 38 Ibid. 39 Bye-law 9.11 of NSDL read with Business Rule 12.6.3 of NSDL, Annexure JA of the Business Rules & NSDL FAQs (hereinafter called FAQs) available at https://nsdl.co.in/faq.php (last visited on 5th September, 2011) 40 Business Rule 12.6.3 of NSDL read with FAQs 41 Business Rule 12.6.2 of NSDL read with FAQs

less than Rs. 1,00,000/-, the DP may process the request based on submission of necessary letter of indemnity, surety, affidavits and No Objection Certificate from all legal heirs/ Family Settlement Deed and waive the requirement of producing Probate or Letters of Administration 42. A nomination can be varied, substituted or canceled, by filing another nomination form with the DP, expressly signifying the interest to vary, substitute or cancel all nominations made earlier43. Similar provisions exist for nomination and transmission of shares, albeit with minor procedural differences, with respect to shares held in the CDSL depository44. The process of transmission in case of dematerialised holdings is more convenient as the transmission formalities for all securities held in a demat account can be completed by submitting documents to the concerned DP, whereas, in case of physical securities the nominee or legatee has to correspond independently with each company in which shares are held 45.

NOMINEE v/s LEGATEE: Having undertaken a detailed analysis of the law relating to transmission of shares by nomination and by Will, let us consider one of the most vexed questions on the subject of transmission, namely- in case of a conflict between the rights of a nominee and a legatee, whose rights will prevail? In this regard, attention must be directed to the fact that section 109A (3) of the Companies Act, 1956 expressly stipulates that the nominee will become the absolute owner of the shares in respect of which the nomination is made irrespective of any Will or disposition by the owners of those shares. In fact, transfer of shares in favour of a nominee shall be considered to be a valid discharge against the legal heirs of the deceased shareholder as far the company is concerned 46. Similar provisions establishing the dominant position of the nominee are contained in the Bye Laws existing for NSDL47. Despite the existence of these express provisions, controversies have arisen time and again regarding the conflict between the rights of a nominee and a legatee, stirring up the proverbial hornets nest. In a recent judgment delivered in the matter of Harsha Nitin Kokate vs. The Saraswat Co-Op. Bank Ltd. & Ors. 48, the Bombay High court held that if the procedure laid down under the
42 43

Ibid. Business Rule 12.6.3.2 of NSDL 44 See Bye Law 13.9 of CDSL read with CDSL DP-Operating Instructions 3.4.2 & 7.6 45 SEBI FAQs on Dematerialisation available at http://www.sebi.gov.in/faq/faqdemat.html (last visited on 5th September, 2011) 46 Supra Note 3, at 837 47 Bye Law 9.11.7 of NSDL 48 [2010]159CompCas221(Bom)

Companies Act 1956 or Depositories Act 1996 is followed, the nominee would become the beneficial owner thereof and thereby become entitled to all the rights in the shares to the exclusion of all other persons. The Bombay High Court also observed that upon such nomination, all the rights incidental to ownership including the right to transfer the shares, pledge the shares or hold the shares would vest in the nominee. In the abovementioned case, the court, which had the occasion to consider the position of a nominee under different statutes like the Insurance Act 1938 and Maharashtra Co-operative Societies Act 1960, noted that position of a nominee which was more akin to a mere trustee under these statutes was very different from the position of a nominee under the Companies Act, 1956 or Depositories Act 1996. Interestingly, section 39 of the Insurance Act requires a nomination merely for the payment of the amount under the Life Insurance Policy without conferring any ownership rights upon the nominee and this position of a nominee as a mere trustee has been affirmed by the Supreme Court in the illustrious case of Smt. Sarbati Devi v Smt. Usha Devi 49. Likewise, section 30 of the Maharashtra Co-operative Societies Act allows the society to merely transfer the shares of the member to the nominee upon the death of a member of a society without vesting the flat in such nominee which would be valid against any demand made by any other person upon the society50. Thus, it becomes abundantly clear that these provisions are made merely to give a valid discharge to the Insurance Company or the Cooperative Society without vesting the ownership rights in the Insurance policy or the membership rights in the Society upon such nominee51. In this context, it becomes pertinent to note that there is one situation in which the legal heirs of the shareholder will gain a right to the shares despite the existence of a nomination. In a situation where the nominee dies before the nominator, the company shall transmit the shares in the name of the legal heirs or legal representatives of nominator and not to the legal heirs of the nominee as the nomination becomes operative only when the nominator or nominators, as the case may be, dies or die and if the nominee is alive upon the death of the nominator52. Conclusion: After perusing the provisions of the law relating to nominees and legatees and the recent judgment of the Honble Bombay High Court on this issue, the inevitable conclusion that can be arrived at is that nomination is a far superior mode of transmission of shares as compared to transmission of shares by way of Will. To summarize, this is chiefly due to the express provisions under both the Companies Act, 1956 and Bye Laws of Depositories which stipulate that a nomination will override a Will , thereby,
49 50

A.I.R.1984 SC 346 Supra Note 48 51 Ibid. 52 Supra Note 3 at 838

giving precedence to a nominee over a legatee. Moreover, as can be observed from the description of procedures entailed above for transmission of shares, the procedure for transmission of shares by Will is plagued with harrowing procedural delays and expenses as the heirs will have to approach the court to produce Probate of the Will or Letters of Administration as may be required by the concerned company/DP. On the other hand, in the case of transmission of shares by nomination, the nominee is saved from the tedium of producing Probate of the Will or Letters of Administration which will go a long way in facilitating quick and efficient transmission of shares in the name of the nominee thereby mitigating delays and cutting timelines in the transmission procedure. However, it is also important to bear in mind that the procedure for transmission of shares will differ from one company to another depending upon the provisions contained in its Articles of Association for such transmission. As already explained above, transmission of shares by way of nomination in case of dematerialized shares is ideal as the nominee will only have to deal directly with the DP rather than dealing with companies in which the shares were held by the nominator. Coming back to the illustration, in the tussle between Y and Z for the shares of X, it is apparent that Y will emerge as the undisputed winner and get a title to the shares despite the fact that the Will made by X displayed a contrary intention. To avoid such a predicament, it would have been prudent for X to either make Z the nominee or to make Z, both, the nominee and legatee under the Will. We must bear in mind the consequences of the folly of X and ensure that we prevent the same so that the fruits of our labour pass smoothly to the beneficiaries of our choice, after our death, without any strife, contention or litigation. Before parting, I have gathered confidence in stating that where there is a Will, there is indeed a way forward. *****************