Recently, the Supreme Court, in the case of Shakti Yezdani & Anr. vs Jayanand Jayant Salgaonkar & Ors, held that a nomination in respect of shares of a company does not vest absolute legal ownership over the shares in favour of a nominee. With this decision, the Supreme Court has finally set to rest the confusion and uncertainty over this issue in view of the decision of the Bombay High Court on effect of nomination for shares of a company and various prevailing decisions on this subject, under other laws.
The confusion with respect to the rights of legal heirs vis-a-vis the nominees was created by the decision of the Bombay High Court in Harshada Kokate V/s Saraswat Co-op Bank and Ors (‘Kokate case‘). In Kokate case, the Bombay High Court had held that, having due regard to the special provisions introduced in the Companies Act 1956 and the bye laws under Depositories Act, the rights of the nominee are akin to a testamentary disposition and accordingly the nominees would acquire an absolute legal ownership over the shares with a right to deal with the same in any manner.
The case pertains to a nomination made by Mr Salgaonkar in favour of certain individuals and entities (‘Nominees’) in respect of his mutual fund investments/shares in various companies. Mr Salgaonkar had also made a Will in respect of his properties. In the suit filed for administration of his properties, the Nominees claimed absolute ownership rights over the subject investments/shares to the exclusion of his legal heirs. The Nominees claimed that the nomination in their favour vested an absolute right of ownership, notwithstanding the succession laws.
In the Kokate Case, the Court had framed the following issues for consideration:
“(i) Whether a nominee of a holder of shares or securities appointed under Section 109A of the Companies Act, 1956 read with the Bye-laws under the Depositories Act, 1996 is entitled to the beneficial ownership of the shares or securities subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estate of the holder as per the law of succession?
(ii)Whether a nominee of a holder of shares or securities on the basis of the nomination made under the provisions of the Companies Act, 1956 read with the Byelaws under the Depositories Act, 1996 is entitled to all rights in respect of the shares or securities subject matter of nomination to the exclusion of all other persons or whether he continues to hold the securities in trust and in a capacity as a beneficiary for the legal representatives who are entitled to inherit securities or shares under the law of inheritance?
(iii) Whether a bequest made in a Will executed in accordance with the Indian Succession Act, 1925 in respect of shares or securities of the deceased supersedes the nomination made under the provisions of Sections 109A and Bye Law No. 9.11 framed under the Depositories Act, 1996?”
and had held that a nominees would acquire absolute legal ownership to the exclusion of legal heirs.
The Supreme Court held:
- There was no material to show that intention behind introducing nomination provisions under Companies Act was to confer absolute title to the shares in favour of nominees. The Companies Act 1956 does not deal with the laws of succession but with the matters relating to the affairs of a corporate. Accordingly, a provision in the Companies Act cannot be given a wider meaning so as to override the succession laws and nomination cannot be countenanced as ‘statutory testament‘.
- Use of the term ‘vesting’ or an overriding non-obstante clause in amending provisions, are not intended to grant ownership rights over the shares in favour of the nominee. Certain other pari materia (i.e. dealing with the same subject) legislations, also employ similar language. However, under all these legislations also, it is well settled position of law that nomination does not grant absolute ownership rights to a nominee.
- Use of the term ‘vesting’ by itself does not imply an absolute ownership but only a right to hold the shares. In multiple Court rulings, the term vesting has been interpreted to mean rights other than absolute ownership rights, having due regard to the respective provisions of law. This vesting provision is only intended to safeguard a company from being dragged into any issues or proceedings regarding succession. There is no third mode of succession that the scheme of the Companies Act, 1956 and Depositories Act, 1996 aims or intends to provide.
- The Courts have, over the years, provided consistent views on the subject and rights of a nominee, not being an absolute legal owner. A departure from this settled position of law is not at all warranted and can have major ramifications.
