Publication: Capital Market Magazine, December 2010
Article Summary: This article examines an important but often overlooked aspect of personal financial planning—the role of nomination and inheritance rules in ensuring smooth transmission of financial assets such as insurance policies and shares. While nomination is widely regarded as a simple mechanism for transferring assets after the death of an investor, the legal rights of a nominee differ depending on the nature of the financial asset involved. In many financial products, a nominee merely acts as a trustee who receives the asset on behalf of the legal heirs rather than becoming the ultimate owner.
The article explains the legal framework governing nomination of securities under the Companies Act and highlights the distinction between transfer and transmission of shares. Transmission occurs by operation of law in cases such as death or succession, and the process can become cumbersome when shares are held in physical form because legal heirs may have to submit succession certificates, affidavits and indemnities to different companies. The depository system simplifies this process as transmission of dematerialised shares can be handled through the depository participant.
The discussion also analyses an important judgement of the Bombay High Court which held that, under the Companies Act, shares vest in the nominee to the exclusion of other legal heirs. This position differs from nomination rules governing insurance policies, where nominees act only as trustees. The article therefore emphasises the importance of aligning nominations with one’s will to avoid unintended consequences in the distribution of assets.
Key Insight: Nomination is not merely a procedural formality—its legal implications can significantly influence how financial assets are ultimately inherited.