Nominees cannot evade the rules on succession to retain shares in mutual funds

Case Analysis of Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors

(2023 SCC OnLine SC 1679)

 

Facts

In the recent case of Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors, the appellants, who were the nominees for shares held in mutual funds by the deceased, claimed that the securities vested with them and not the heirs after the testator’s death.

However, such a position would not only alter the succession laws paradigm but also expand the scope of many other laws, including the Companies Act and the Depositories Act. Taking into consideration these implications, the Supreme Court had to decide whether a nominee becomes the full owner of the securities for which they have been nominated by the deceased owner of property, under the provisions of the Companies Act, 1956 to the exclusion of the rights of the legal heirs/legatees obtained through the laws on succession.

Section 109A of the Companies Act (pari materia to S. 72 of the Companies Act, 2013) provides for the vesting of shares/debentures of a share/debenture holder with a nominee ‘in the event of his death’. Similarly, Bye-law 9.11.1 under the Depositories Act, 1996 provides for the ‘vesting’ of the securities with the nominee on the death of the beneficial owner.  These provisions include a non-obstante clause, and use the words ‘vested’ and ‘nominee’ and this has further paved the way for an interpretation that the nomination would automatically make the nominee an absolute owner of the securities, regardless of what the succession law stipulates.

Supreme Court’s Clarification: Nomination is not succession

The Supreme Court clarified that the provision of a nomination facility in the above provisions was in order to ease the cumbersome process of obtaining multiple letters of succession from various authorities and also to promote a better climate for corporate investments within the country.

There is no material to show that the intent of the legislature in introducing a method of nomination through the Companies (Amendment) Act, 1999 was to confer absolute title of ownership of property/shares on a nominee. The intent behind introducing the nomination facility was not to confer absolute ownership but to address practical challenges in the aftermath of a shareholder’s demise. The Supreme Court stated that to hold otherwise would exceed the scope and extent of the Companies Act, of 1956.

Interpretation of the provisions

The legislative intent of creating a scheme of nomination under the Companies Act, 1956 in the Court’s opinion is not intended to grant absolute rights of ownership in favour of the nominee merely because the provision contains three elements i.e., the term ‘vest’, a non-obstante clause and the phrase ‘to the exclusion of others’. Moreover, the usual mode of succession should not be impacted by such a nomination. The legal heirs therefore cannot be excluded by virtue of nomination.

The term ‘vest’ or ‘vesting’ has been defined by the courts, from time to time and this would suggest that the mere use of the word ‘vest’ in a statute does not confer absolute title over the securities. Further, the term ‘vesting’ is also used in other contexts such as the Indian Succession Act, 1925 wherein section 211 vests the deceased’s estate in the administrator or executor, although neither becomes the owner of the property but merely holds it until it is distributed among the lawful successors. Hence, “vesting” cannot of itself make the nominee an absolute owner.

Such vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 is only for a limited purpose, i.e., to enable the company to deal with the securities in the immediate aftermath of the shareholder’s death. Further, it is to avoid uncertainty as to the holder of the securities considering the diverse claims of the heirs, which could hamper the smooth functioning of the affairs of the company. Essentially, the court’s interpretation highlights that nomination does not supersede the established mode of succession.

Furthermore, the non-obstante clause, often a subject of scrutiny, should be interpreted within the overarching goal of discharging the company’s liability upon the shareholder’s death. The court should keep in mind the intent and the scheme of the Companies Act, 1956 which is to vest the shares in the nominee to the exclusion of any other person, for the purpose of discharging 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 deceased and are ready to register the transmission of shares, by due process of succession law.

The court unequivocally dismissed the prospect of the nomination being considered a ‘statutory testament’, reinforcing that the Companies Act, 1956, does not address matters of succession. The court’s position confirms that succession planning does not fall within the scope of a company’s affairs or authority, thereby preserving the integrity of existing succession laws.

The Supreme Court’s clarification achieves a balance between the facilitation of corporate processes and the preservation of the legal framework governing succession. This verdict not only resolves the inconsistencies in nomination and succession case law but also establishes a precedent for the harmonious coexistence of nomination and succession laws in an evolving legal landscape.

 

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