Simplifying nominations can boost financialisation

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Makarand possessed a substantial portfolio of publicly listed shares in his demat account, with his daughter designated as the nominee. He unfortunately passed away during a trip abroad. His daughter submitted the required forms along with a notarised death certificate (in English and issued by the country where Makarand passed away). The concerned officials, however, insisted that the death certificate be counter-signed by the Indian embassy in the concerned country before the shares could be transferred. This insistence on self-made rules, which were contrary to regulations, caused significant distress to the daughter.

The Securities and Exchange Board of India’s (Sebi) recent consultation paper aimed at overhauling nomination facilities for mutual funds and securities in demat accounts seeks to rectify such issues. The paper explicitly states that nominees shall not be required to submit additional documents like affidavits, indemnities, undertakings, attestations, or notarisations. In the case of joint holdings, it clarifies that even submission of KYC (know your customer) documentation from the surviving joint holders will not be necessary (since this would have been done already). 

The consultation paper’s key proposals are as follows: 

– Acknowledgement of the ‘rule of survivorship’ in joint ownership, facilitating quick and straightforward asset transfers to joint holders with minimal requirements. 

– An increase in the permissible number of nominees beyond the current limit of three. This will address the needs of individuals, such as a childless couple I know that wants to nominate their siblings’ children (totalling around 20 nephews and nieces), thereby simplifying asset transfer after their demise to their desired nominees. 

– Provision for appointing alternative nominees in the event the primary nominee predeceases the asset holder. For instance, a mutual fund investor has designated her spouse as the nominee. She will be able to appoint her two children as equal alternative nominees if her spouse predeceases her. This feature is particularly relevant in a Covid-like situation when both the asset holder and the nominee passed away in quick succession. This provision will ensure such investments are not rendered nominee-less. 

– Currently if a minor is named nominee, it is compulsory to name a guardian. Investors (especially when both spouses are joint holders) sometimes struggle to identify suitable guardian/s and hence refrain from nominating. The paper proposes to make the nomination of a guardian for minor nominees optional, recognising that minors may reach maturity within the investor’s lifetime, thereby eliminating the need for guardians. Moreover, minors are entitled to own real estate or other properties and enjoy rights, title, interest, and other benefits. Should the need arise to sell or transfer the assets while they are minors, a guardian needs to be appointed under the appropriate Act.

– Offering the option to complete nominees’ KYC either at the time of nomination or any time subsequently before the holder’s death, enabling swifter asset transfer upon the holder’s death. 

– Allowing the holder to specify whether a nominee/s can act on the holder’s behalf in cases of temporary or permanent incapacitation, following a defined process. This will allow holders to access their assets when they need them most. Instances of incapacitation among Indians in their later years are increasing. 

– Separating the transfer of assets to nominees from the legal process of succession or transmission (according to the succession law applicable to the holder, or according to the holder’s Will), thereby simplifying the process and ensuring that disputes between nominees and legal heirs are resolved legally without implicating mutual funds or depository participants.

Truth be told, the consultation paper’s initiatives, combined with Sebi’s centralised death reporting mechanism, are poised to significantly expedite the transfer of assets to nominees, potentially within a few weeks (or even days) of a Sebi-regulated entity being notified about an asset holder’s death. This groundbreaking “Made for India” approach will not only streamline the transfer process but also enable incapacitated holders to manage their financial assets. It is excellent news for the economy as it will boost the financialisation of household investments.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

Mandatory disclosure by SEBI

(A slightly different version of this column first appeared in the Business Standard on February 12, 2024)

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