Nomination of Shares and Rights of Nominees

Introduction

The Companies Act, 2013 allows a shareholder to make nomination with regard to shares held by him in a company. A nomination is a written mandate given by a shareholder to a company describing a particular person, to whom the shares held in the company shall vest in the event of death of the shareholder. The particular person described in the mandate is known as the nominee. Nomination is a useful procedure that enables a company to pinpoint a single legal representative of a deceased shareholder to transmit his shares and also avoids the need to deal with a host of legal heirs who might be reeling under inheritance disputes.

In this article, the author deals with general provisions relating to nomination of shares and also, examine the rights of nominees with respect to the shares vested in them.

Nomination under the Companies Act, 2013

Shares of a company are freely transferable assets under law. A shareholder, during his lifetime, is free to transfer shares held by him in a public company subject to reasonable restrictions, if any, imposed under the Articles of Association. Nomination, further, enables a shareholder to provide sufficient directions to a company with regard to disposal or transmission of shares held by him in the event of his death.

Section 72 of the Act provides that every holder of securities of a company may nominate any person to whom his securities shall vest in the event of his death. The term Securities includes shares of a company[1]. If the shares are held by joint holders, such joint holders will have to nominate a single person as nominee. The Act does not restrict the choice of persons who may be designated as a nominee. Even a minor can be nominated by the shareholder. If the nominee is minor, the shareholder shall appoint any person to become entitled to the shares in the event of the death of the nominee during his minority. A nomination can be filed anytime during the lifetime of the shareholder. It has to be filed in writing to the company in the prescribed form SH-13[2]. A nomination once filed can be cancelled or altered by filing form SH-14. The cancellation or variation shall take effect from the date on which the notice of such variation or cancellation is received by the company.

Transmission of Shares to Nominee

A company has to maintain a Register of nominations filed with it and registered by it. The contents of the register have to be eventually updated and duly authenticated by the Company Secretary or such other person as may be authorised by the board. On receipt of intimation of death of the shareholder, the company secretary has to ensure from the register that the shareholder has filed a nomination and that such nomination is valid.

Once a valid nomination has been verified, a nominee may adopt any of the two courses specified under Rule 19 of the Companies (Share Capital and Debenture) Rules, 2014. He may either get the shares registered in his own name or transfer the shares to another person as the deceased shareholder could have performed.

If the nominee opts to be a member of the company, he shall inform the company in writing about his intention to do so. Such a notice must be signed and shall be accompanied by the death certificate of the deceased shareholder. Stamp duty would not apply in the case of transmission.

A transfer of shares by the nominee shall take effect as if the death of the shareholder has not occurred. Such a transfer shall be subject all procedures, restrictions and limitations applicable to transfer of shares by a shareholder, under the Act. The nominee has to deliver instrument of transfer or transfer deed in writing to the company in prescribed form SH-4. The instrument has to be properly executed and adequately stamped. The transferee acquires proper title to the shares transferred subject to all liabilities and restrictions attached to it. Such an option enables the nominee to dispose the shares without having to go through the hassles and responsibilities of being registered as a member of the company.

Rights of a Nominee

A nominee steps into the shoes of a shareholder after the death of the shareholder. As noted above, he can deal with the shares as if the deceased shareholder has mandated the transaction to the company. A nominee shall be entitled to same dividends or interests and other advantages as if he had been the original owner of shares. Also, if he opts to register himself as the holder of shares, he can exercise all membership rights in relation to the meeting as conferred by the Articles of Association.

A company gets good discharge from its obligations relating to the shares once it complies with the written notice or instrument executed by the nominee. However, the ownership rights of the nominee vis-à-vis legal heirs of shares transmitted to a nominee had remained a controversy until recently.

Initially, the courts placed the nominees on a superior pedestal than the legal heirs under a validly executed will. The Delhi High Court in Dayagen Pvt. Ltd. v. Rajendra Dorian Punj[3] has held that a nominee is vested with full and exclusive ownership rights in respect of the shares of which he is the nominee, upon the death of the shareholder. In Harsha Nitin Kokate v. Saraswath Co-operative Bank Ltd.[4] the Bombay High Court had held that the intent of the nomination is to vest the property in the shares, which includes the ownership rights thereunder, in the nominee upon nomination validly made as per the procedure prescribed under the Companies Act, 1956. In this case, the Court was seized with interpretation of the word ‘vest’ as used in Section 109A of the Companies Act, 1956.

Thereafter, another bench of the Bombay High Court in Jayanand Salagaonkar v. Jayasree Jayant Salagaonkar[5] considered the decision in Harsha Kokate case. The Court doubted the merits of the decision and was of the opinion that the decision was per incuriam. The controversy set out by the aforesaid decisions were laid to rest by a division bench of the Bombay High Court in Sakti Yazdani v. Jayanand Salagaonkar[6].  The division bench concluded that Harsha Kokate decision was per incuriam and upheld the decision in Salagaonkar case. The Court held that the single judge had failed to consider binding judgments of the Supreme Court pertaining to nomination under various laws which were pari material to Section 109A.

At present, the legal position holding gorund is that a nomination under the Companies Act does not create a third mode of succession. A nomination under the Act cannot override a valid testamentary succession. A nominee is a mere trustee for the legal heirs of the deceased shareholder. Nominees have a fiduciary relationship with the legal heirs to safeguard the shares and allied membership rights until the will of the testator shareholder is executed. Therefore, nomination alone cannot create ownership in shares. It is merely a device to enable hassle free transmission of shares for the benefit of companies.

[1] S.2(81), Companies Act, 2013 r/w Section 2(h), Securities Contracts (Regulation) Act, 1956

[2] R.19, Companies (Share Capital and Debenture) Rules, 2014

[3] Co. A. (SB) No.14 of 2007, High Court of Delhi

[4] 2010 SCC OnLine Bom 615

[5]  [2015] 190 CompCas 44 (Bom)

[6] Appeal No. 313 of 2015, Bombay High Court