What is the role of a nominee, if the nominee is different from the legal heir?

The concept of nominee and legal heir are very different. While the legal heir is the person actually entitled to the estate/ property of the deceased, the nominee simply plays the role of a receiver/ trustee till the assets are transmitted to the rightful heir. A legal heir should be identified as such in the Will or in its absence, through the operation of succession laws. A nominee could be a legal heir in some cases, but not always.

Why are nominations for demat accounts and mutual funds important?

Nomination largely exists to ease the operational friction for institutions such as banks, depositories and asset management companies (AMCs). In the absence of nomination, the transmission of assets to the legal heirs can take a painfully long time, as there could be court disputes among the heirs. This could result in funds getting locked up forever with these institutions. To overcome this, nominations have been made mandatory.

Nomination helps quick release of funds, while in its absence, heirs would be required to produce a succession certificate or a probate (when a Will is certified by a competent court) which could take months.

How does the transmission of ownership of a share or mutual fund happen on the death of the investor?

According to Sonam Chandwani, Managing Partner at KS Legal & Associates, transmission of shares and mutual fund units, upon the death of an investor, is governed by a mix of statutory law and succession principles. In practice, if a valid nomination exists, the AMC or depository will transmit the securities to the nominee as a trustee or custodian. However, such nomination does not override the rights of legal heirs unless expressly backed by a testamentary instrument like a Will. In the absence of both nomination and Will, transmission becomes documentation-heavy and is effected in favour of legal heirs based on succession certificates, probate or letters of administration.

How do the Hindu Succession Act and the Muslim Personal Law affect ownership rights in shares and mutual funds?

As per Chandwani, the succession laws become relevant only in the case that an individual dies intestate (without having left a Will). Under the Hindu Succession Act, a male’s estate initially devolves on Class I heirs such as spouse, children and mother in equal proportion. If none of the Class I heirs are alive, it passes on to Class II heirs, with the father occupying the foremost position in the Class II hierarchy—meaning, a surviving father inherits the estate in full. In the case that the father is also not alive, the estate then devolves on other Class II heirs such as siblings.

For a Hindu female, it is more nuanced. The identification of beneficiaries depends on the manner in which the asset was acquired—whether self-acquired/ derived through her husband or inherited from her parents.

For individuals governed by the Indian Succession Act, 1925 (such as Christians and Parsis), the assets devolve either in terms of a valid will, or in its absence, through intestate succession typically prioritising the spouse and lineal descendants in defined proportions.

Under Muslim Personal Law, succession opens immediately on death, and the estate is divided as per fixed fractional shares among legal heirs, leaving no scope for nomination to alter that distribution.

Thus, while the transmission process may operationally recognise a nominee for efficiency, the final entitlement is always subject to testamentary instruments or succession laws.

What was the proposal regarding operating the accounts of those who are incapacitated in the January 2025 circular? What is the change SEBI is proposing now and why?

The January 2025 circular allowed investors to empower nominees to operate accounts if they become incapacitated. Conventionally, a nominee becomes trustee of the assets only upon the demise of the investor and therefore, can have no power over the assets while the investor is alive. This causes confusion. Hence, SEBI now proposes withdrawing this facility and use the existing Power of Attorney (POA) mechanism instead.

What are the nominee details to be provided, as per the recent SEBI consultation paper?

The recent paper requires just two details for nomination—the name of the nominee and his relationship with the investor; additionally date of birth will be required in case of a minor nominee. Other KYC details such as address, phone number, e-mail, personal identifier and percentage share of nominee which were earlier mandated have now been made optional. Where percentage shares are not specified, the assets in the account/ folio shall be apportioned among the nominees equally.

This move does simplify the onboarding process and encourage prompt completion of the nomination process. However, details such as personal identifier help ensure funds are handed over to the persons originally intended to. Whether this relaxation turns out to be a double-edged sword remains to be seen.

What is the procedure if an investor wishes to opt out of providing nominations?

Under the earlier January 2025 circular, investors were required to submit a declaration for opting out of nomination either by a signed physical form authenticated by a one-time password or a video recording. This made opting out onerous.

The new proposal simplifies this by making nomination the default mode. Nomination in case of joint holding is optional, though. To opt out, investors will now simply select the ‘opt out’ option, which will trigger a pop-up message explaining the benefits of nomination and the risks of unclaimed assets. Investors just need to provide consent within this pop-up to proceed.

Further, the paper suggests the depositories and AMCs to regularly send e-mail/ messages to investors who opted out, encouraging them to file nomination details.

What is the maximum number of nominees proposed in the consultation paper? Does this align with the maximum number of nominees in bank accounts and deposits?

SEBI’s recent paper proposes that the maximum number of nominees for demat accounts and mutual fund folios be set at four. This proposal aligns with banking norms, where depositors can now provide up to four nominees.

Earlier, the January 2025 circular had increased the limit from three to 10 nominees. On review of sample data, SEBI learned that less than 0.2 per cent of investors had opted for even three nominees, leave alone 10. Also, industry participants had represented to the market regulator that increasing nominees to 10 may create a strain on the system.