Investors protection must include posthumously held investments
The Securities and Exchange Board of India (SEBI) was set up to promote, develop and regulate the capital market and take measures to protect the interests of investors. The regulations and measures hitherto promulgated by SEBI relate to safeguarding the interests of those making investments in the capital market during their lifetime and upon their death.
However, the issue of protecting the securities vested in the estate of the deceased investor having been acquired during his lifetime has not been addressed.
The securities left behind by the deceased and bequeathed under a will in good faith to various beneficiaries (legatees) are often squandered away by the administrator appointed by the deceased.
In some instances bequests are made but the legatee does not know of the same, resulting in no claim being made on the estate of the deceased. True, it is the duty of the administrator to administer the property, taken possession of by him under the will, in the manner instructed.
Transfer, transmission conundrum
There is another area which deprives the actual beneficiary of the benefit. This relates to the transfer/transmission formality. An investor can hold investment jointly with one or two other persons and no more that is, A with B and C.
Upon the death of the first holder A, the second (B) and third (C) ironically become shareholders without being joint owners or contributing towards the purchase consideration. It is open to B and C to dispose of the shares in the open market without the knowledge or consent of the legal heir of the estate or the legatees of the will as the case may be.
On the contrary, if A, B and C have jointly nominated someone as the nominee, then, under Section 109(A) of the Companies Act, the said nominee will be the person in whose favour the deceased's, shares will vest upon the death of all the joint holders. This defeats the very purpose of Section 109(A).
The Department of Company Affairs (DCA) has clarified that no transfer formalities are required for transposing the order of names if a request is made to this effect by all the joint holders, that is, A, B and C. On the other hand, the order of the position of the first holder cannot be altered unless there is a transaction of sale or a transfer
Section 109 A was introduced in 2002 in response to the representation received from various quarters. The purpose of nomination was that upon the death of the shareholder, the shares held by the deceased shareholders should vest in the name of the nominee irrespective of the joint holdings. In other words, in case A dies, the shares can be transmitted to B and C but they do not become the beneficiaries as a nominee has been appointed.
Paradoxically, this objective has not been met, as the section clearly says:
That the nomination should be made in the prescribed form.
Rules prescribed under the said section require that all the joint holders should jointly nominate a nominee.
Upon the death of all the joint holders the shares will vest in the name of the nominee even though B and C have no beneficial right, title or interest in the property.
It ironic that on the death of the beneficial owner the legacy passes on to all the joint holders who are not beneficial owners. To get out of this rigmarole, the legal heirs and legal beneficiaries must obtain a probate from the court which will give a final stamp and seal to the ownership of the property.
The law should make joint holding distinct from joint ownership. A joint holder is not necessarily a joint owner.
Therefore upon the death of the shareholder A, the shares of A being vested in B and C upon his death is illogical. B and C are merely trustees of A and have no right of ownership. The Companies Act should be amended to plug this loophole. It is possible to address this issue by a self-regulatory mechanism on the lines suggested hereunder:
The investor should ensure that the proposed administrator/executor of the estate is trustworthy, dependable and honest. Companies and other institutions must be informed about the investments made, the will being left behind and the share of the legatees. Better still, a copy of the will must be sent to the respective entities.
The legatees that is, beneficiaries must be informed about details of the property being bequeathed in their favour as also the legal heirs, about the details of the will.
When a person's name is added as a joint holder who has not contributed to the purchase of the property, the joint holder should be asked to make a declaration that he is not a beneficial owner and his name is added only as a trustee to the beneficial owner (Section 187 C of the Companies Act). Better still, as far as possible, include a beneficiary as a joint holder.
In the event of a person who is not appointed as a beneficial owner but as a nominee a similar declaration should be obtained. It would be wiser to file a nomination with a company instead of holding shares in joint names.
Upon the will becoming operative every beneficial owner should file a declaration of beneficial ownership to the company. This, despite, the DCA's clarifications that such a declaration may not be necessary as there is, inter se, no change of ownership.
Generally, to take such steps or measures as are necessary to ensure that a well-earned property is distributed in the manner instructed by the holder and nothing is done to betray his will.
All chambers of commerce should send a memorandum to the Ministry of Company Affairs seeking recitation of the anomalies in the Companies Act.
N. R. Moorthy (The author is a Pune-based company secretary.)