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During the darkest days of the Covid nightmare, a senior professional working for a large company passed away suddenly. He had left no will and his spouse had no idea about the financial investments he had made. His son reached out to me for help in discovering those assets and getting them transmitted to his mother.
Fortunately, discovering the investments made in mutual fund schemes and shares did not prove very difficult. The son had access to his father’s personal email, where he found a statement from the Central Depository Services Limited (CDSL). It contained all the details of the investments in mutual funds and shares.
His mother was the sole nominee in the seven mutual funds and two depository accounts. Thereafter began the long-drawn process of recovering the investments.
First, a notarised death certificate had to be submitted to all the nine entities. One insisted on verifying the notarised death certificate against the original, despite instructions to the contrary. All documents, including the transmission form, the Permanent Account Number (PAN) card, and the cheque copy and Know Your Customer (KYC) details of the mother had to be submitted to all the nine entities. Many non-standard requirements led to avoidable harassment and delay. Even in a case where all the nominations were in place, the process of transmission took a year.
The situation has been transformed today thanks to the Securities and Exchange Board of India’s (SEBI) path-breaking reforms. All mutual funds and Depository Participants now require investors to either appoint a nominee or declare that they do not wish to make a nomination.
SEBI has recently notified a detailed centralised mechanism for reporting an investor’s demise that requires the investee entities to reach out proactively to the nominees. No comparable mechanism exists anywhere else in the world.
Here’s how it will work in a case like the one mentioned above. The deceased’s death certificate and PAN will have to be submitted to only one of the nine entities. This entity will verify the death certificate within one working day and notify any one of the six KYC Registration Agencies (KRAs) about the verification. The KRA, in turn, will perform independent verification using details available in its system within one working day. The deceased’s KYC will be marked as verified and the KRA will notify all the nine entities about the updated status. Within five days of receiving this message, all nine entities will need to reach out to the nominee(s), informing them about the transmission procedure and the documents to be submitted. All this will happen within a week of submission of the death certificate. This will aid in the discovery of unknown assets: Even if the nominee was aware of only one of the investments, he will get to know about the investments with all nine entities. This rapid permeation of information within the system will also prevent fraud.
This proactive reach-out feature was suggested in a white paper (https://bit.ly/3ZzCNI8) written by Pramod Rao (in his personal capacity), with inputs provided by the Association of Registered Investment Advisers (ARIA), and a foreword by K V Kamath.
Several suggestions of the white paper are yet to be implemented. These include optionally allowing KYC of the nominee before the investor’s death, making it optional to name the guardian for minor nominees, providing for successive nominations, and above all, elevating the nominee to the status of a beneficial owner. The white paper, when fully implemented, will improve the “ease of living” index considerably for the families of deceased investors.
Truth be told, these changes need not be restricted to the capital markets. A centralised reporting mechanism for the entire financial markets, which includes banks, life insurance companies, the National Pension System (NPS), small savings schemes, and Employees’ Provident Fund Organisation (EPFO) would create the dream situation: Submit documents to one financial entity and the assets lying with all the financial entities get transmitted within a few days. To that day, amen.
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 www.business-standard.com or the Business Standard newspaper
(A slightly different version of this column first appeared in the Business Standard on October 09, 2023)