Introduction
The Securities and Exchange Board of India (“SEBI”) issued a Consultation Paper on March 17, 2026, proposing material modifications to the nomination framework applicable to demat accounts and mutual fund (“MF”) folios. The proposals seek to revisit and simplify a set of requirements introduced by SEBI’s circular dated January 10, 2025 (“2025 Circular”), several provisions of which encountered significant operational friction during implementation, prompting a deferral circular in December 2025.
The core impetus is investor-facing: data from 2025 indicates that over 75% of newly opened demat accounts opted out of providing a nominee, suggesting that the existing framework, despite being well-intentioned, may be adding unnecessary friction to investor on-boarding. SEBI now proposes to address this by reducing mandatory information requirements, rethinking opt-out mechanics, aligning the maximum number of nominees with banking norms, and withdrawing a contested provision that had permitted nominees to act on behalf of living but incapacitated investors.
Background
Prior to the 2025 Circular, the nomination framework for demat accounts and MF folios had remained largely static, permitting up to three nominees and requiring a mix of physical and online submission mechanics. The 2025 Circular sought a comprehensive overhaul: it expanded maximum nominees from 3 to 10, mandated the collection of seven categories of nominee data (including address, mobile, email, percentage share, and a personal identifier), introduced a video-based opt-out mechanism, and—most controversially—allowed a nominee to operate an investor’s account where the investor was incapacitated but legally competent.
In practice, these changes generated three categories of difficulty. First, the heightened data requirements for nominee registration created friction at the point of investor on-boarding, with intermediaries reporting increased drop-off rates. Second, the video opt-out mechanism posed infrastructure and data-retention challenges for regulated entities. Third, the “nominee as manager” provision generated legal uncertainty—conventionally, a nominee’s interest crystallises only upon the death of the account holder, and allowing a nominee operational authority over a living investor’s account risked blurring this boundary, inviting fraud and future probate disputes.
SEBI has now acknowledged these concerns and is consulting on a recalibrated framework. Critically, the December 2025 deferral circular had already stayed implementation of the contested provisions—the current Consultation Paper represents the next step in charting a permanent path forward.
Analysis of Proposed Measures
Proposal 1 – Withdrawal of Nominee Authority for Incapacitated Investors
The 2025 Circular had introduced a facility permitting investors who were physically or cognitively incapacitated—but not legally incompetent—to empower their nominee to operate the account on their behalf. SEBI now proposes to withdraw this facility entirely.
The rationale is twofold: (i) implementation costs and audit trail difficulties flagged by industry, and (ii) conceptual incongruity with the legal character of a nominee, who functions as a trustee of assets strictly upon the investor’s death. SEBI’s proposal is to redirect such scenarios to the existing Power of Attorney (“POA”) mechanism, which is legally better equipped to govern agency relationships between living persons.
| Comment: The reliance on POA as a substitute is legally sound but practically limited—creating and registering a POA requires more deliberation and legal formality than the lightweight nominee empowerment mechanism originally proposed. Retail investors, particularly in situations of sudden incapacitation, may not have a POA in place. Intermediaries offering wealth management or custody services to HNI or elderly clients should proactively revisit their standard documentation practices. |
Proposal 2 – Reduction in Mandatory Nominee Details
The 2025 Circular required collection of seven fields: name, percentage share, relationship, address, mobile, email, and a personal identifier. Industry feedback indicated this was burdensome enough to deter nomination entirely.
The revised proposal reduces mandatory fields to just two: (i) name of nominee, and (ii) nature of relationship with the investor. All other information—including contact details, percentage share, and identity proof—would become optional. Where no percentage allocation is specified, the proposed framework defaults to equal division among nominees, with any fractional remainder allocated to the first-named nominee.
| Comment: While the simplification is welcome from an on-boarding perspective, the removal of percentage allocation as a mandatory field introduces downstream risk. Equal division defaults may not reflect the investor’s actual testamentary intentions and could generate disputes among nominees, particularly in blended family structures. For sophisticated or high-value investors, advisors should continue recommending completion of optional fields—especially percentage shares and identity documentation—as a matter of best practice. |
Proposal 3 – Nomination as Default; Simplified Opt-Out
Perhaps the most structurally significant change, Proposal 3 inverts the existing opt-in model. Under the proposed framework, nomination would be the default mode when opening any new single-holder demat account or MF folio. Investors who do not wish to nominate must affirmatively opt out by selecting an opt-out option, upon which a pop-up declaration explaining the consequences would be displayed. The investor’s active consent to the pop-up would constitute a valid opt-out.
Importantly, the prior video-based opt-out requirement—which had raised implementation concerns—would be dropped entirely. For jointly held accounts, nomination remains optional. Regulated entities would also be required to nudge non-nominating account holders via monthly emails and SMS, and to display pop-up messages upon login.
| Comment: The default-to-nominate model is nudge architecture at its most explicit and is consistent with global trends in behavioural regulatory design. For intermediaries, the shift will require meaningful system changes—particularly in designing compliant on-boarding flows and building the pop-up declaration infrastructure. For institutional or corporate clients who open accounts in a fiduciary or custodial capacity, the default-nomination model may require some clarification as to how the opt-out mechanics will work for non-natural persons. This remains an open question not addressed in the Consultation Paper. |
Proposal 4 – Maximum Nominees Reduced from 10 to 4
The 2025 Circular had dramatically increased the maximum number of nominees from 3 to 10—a ceiling that proved both operationally unwieldy and, as sample data demonstrates, largely unnecessary. SEBI’s own data shows that across demat accounts opened in 2025, fewer than 1% of investors with a nomination opted for even two nominees, and a negligible fraction opted for three.
The revised proposal aligns the securities market with banking practice, where the limit has been set at four nominees. The maximum number of joint holders within a demat account or MF folio remains three. Where multiple nominees inherit an account, they may either remain as joint holders of the original account or open separate accounts, subject to the three-holder cap.
| Comment: The four-nominee cap is pragmatic and data-driven. However, the mechanics for nominees choosing between joint continuation and separate accounts post-succession are not yet fully elaborated in the draft circular—this will likely require operational guidelines from depositories and RTAs. Clients with estate planning structures involving trusts or complex family arrangements should be advised to consider whether their succession planning adequately accounts for the three-joint-holder cap. |
Way Forward
The Consultation Paper reflects a mature and pragmatic regulatory reset. SEBI deserves credit for acknowledging operational feedback quickly and for using empirical data—notably, the striking statistic that over 75% of new demat account holders opted out of nomination through 2025—as the basis for its recalibration. The proposals, if finalised, will meaningfully reduce friction for retail investors and lower compliance costs for intermediaries.
What Works Well
- The default-to-nominate model is the single most consequential change and is likely to substantially increase the number of accounts with active nominations over time, reducing unclaimed asset accumulation.
- Reducing mandatory fields to name and relationship is a proportionate response to the drop-off data.
- The POA-based approach for incapacitated investors reflects sound legal reasoning.
What Remains Unclear
- The application of the default-nomination model to corporate or institutional account-holders is not addressed. SEBI should clarify whether and how the opt-out mechanism operates for non-natural persons.
- The operational workflow for post-succession account decisions (joint continuation vs. separate accounts among nominees) requires granular guidance from depositories and RTAs before the circular can be practically implemented.
- No timeline for the circular to come into effect is specified in the draft (the effective date reads “xx xx, 20xx”). Given the system changes required, clients should budget for an implementation window of at least 3–6 months post-finalisation.
- The interaction between the new nomination framework and the separate, ongoing transmission norms review—explicitly referenced in the paper—creates temporary regulatory fragmentation. The final picture will only be clear once both reviews are concluded.
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This update is intended for general informational purposes and does not constitute legal advice. For more information, please reach out to Shubham Sharma at 2636@cnlu.ac.in.
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