Recent Proposed Changes To Nomination Rules In India

Recent changes to India's nominee regime are a step in the right direction, aiming to streamline the inheritance process and reduce unclaimed deposits/assets

A nominee is someone who is chosen by the Account holder to receive the deposited funds in case of the Account holder’s death.

Banking Companies (Nomination) Rules 1985 permit banks to pay dues to nominees in the event of death of depositor(s) without asking for succession certificate or verifying claims of legal heirs. This simplifies settlement.

Who can be a nominee?

The eligibility criteria for a nominee:

• A nominee for a Bank Account is a person the Account holder trusts. He/ she can be a family member, child, spouse or relative.
• If the nominee is not the legal heir, he/ she won’t be entitled to keep the funds. A legal heir is someone who is lawfully entitled to inherit the funds.
• The nominee acts as a trustee, meaning he/ she must transfer the funds to his/her legal heir.
• An Account holder can appoint different nominees for his/ her multiple Bank Accounts.
• A minor can be a nominee, but a guardian must be designated to receive the funds on the minor's behalf.

Nominee v/s Legal heir

Aspect	Nominee	Legal Heir
Definition	A person designated by the Account holder to receive the funds in case of the Account holder's death.	A person who inherits the deceased's assets as per the Will or inheritance laws.
Purpose	To act as a trustee and pass the funds to the legal heirs.	To inherit the deceased’s assets and own them.
Rights to funds	No ownership rights; acts as a custodian	Has full legal rights to the funds and assets.
Legal standing	Facilitates the transfer of funds but doesn't override the rights of a legal heir.	Recognised by law to inherit the deceased's assets.

Revisions to India's Nomination Rules by Regulators

1. New nomination rule for bank lockers, and deposits: Banking Laws (Amendment) Bill, 2024

Currently, the Banking Regulation Act allows single or joint deposit holders to appoint a nominee for their deposit.

New rules allow the appointment of up to four nominees for bank lockers and deposits. The nominee who has been named higher in the order of nomination will receive priority.

Depositors can update, add, or remove nominations in the bank accounts through net banking or can visit the bank and fill out the necessary Nominee forms to make the changes.

2. The Securities and Exchange Board of India (SEBI) announces uniform nomination rules for Mutual Funds and Demat Accounts

SEBI has made an announcement on 30th September 2024 regarding the implementation of standardised protocols for nomination facilities and consistent norms pertaining to nominations in demat accounts and mutual fund investments.

Revisions:

1) A maximum of ten nominees can be appointed.

2) Nominees can act on behalf of incapacitated investors.

3) Nomination is optional for joint demat accounts and mutual fund folios. Confirmation will be required for opting out of singly held accounts.

4) Nominees will now need to provide unique identifiers such as PAN, passport numbers, or Aadhaar for better accuracy and transparency.

Potential Impacts of the New Changes to Nomination Rules in India

Positive Impacts

1. The rising number of unclaimed deposits in banks, which reached Rs 78,213 crore in March 2024, has prompted these changes. The aim is to reduce unclaimed funds by simplifying the transfer process.

2. The primary objective behind SEBI's initiative is to streamline the asset transfer process to nominees, thereby minimising red tape.

3. SEBI is focused on streamlining the transmission process to reduce the paperwork burden on nominees.

Negative Impacts

1. With multiple nominees, decision-making could become difficult as the signatures of all nominees would be needed for asset transmission, potentially causing operational issues.

2. SEBI has made nomination optional for joint demat account holders. However, complications may arise if all joint account holders pass away and no nominee has been designated, leaving the assets unclaimed.

3. SEBI move on “allowing nominees to act on behalf of incapacitated people”, might lead to fraud.

Conclusion

The recent changes to India's nominee regime are a step in the right direction, aiming to streamline the inheritance process and reduce unclaimed deposits/assets. By simplifying paperwork and reducing delays, these reforms can improve the efficiency of asset transfers to rightful heirs. However, the new SEBI revisions may give arise to challenges due to procedural difficulties, with the presence of so many nominees possibly leading to deadlocks and delays. Additionally, the provision allowing nominees to act on behalf of incapacitated individuals requires careful oversight to prevent potential abuse. While the initiative holds promise, its success will depend on careful implementation, supported by strong checks and balances.

Disclaimer –This is currently at the proposal stage, and these revisions are yet to be implemented.