Nominee: From trustee to owner–a case for legislative reform

For most Indians, succession planning for assets like government small savings schemes (SSS), provident funds, insurance policies, bank deposits, and securities feels assured through nomination. Yet, under the Indian Succession Act, 1925, and relevant personal succession laws, a nominee is deemed merely a trustee. The nominee’s legal role is limited to collecting the deceased’s assets and transferring them to the rightful heirs. This position was reaffirmed by the Supreme Court on 14 December 2023, in the Shakti Yezdani & Anr. vs. Jayanand Jayant Salgaonkar & Ors. case.

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But does this interpretation align with legislative intent?

For the common citizen, a plain reading of the laws governing financial assets suggests otherwise. 

Amendments to the Insurance Act, 1938, effective from December 2014, make the nominee “beneficially entitled” to insurance payouts and even extend the entitlement to the nominee’s legal heirs under Section 39(8). If the intent was merely to preserve the trustee role, why introduce such changes? This shift indicates legislative intent favouring nominees as owners rather than intermediaries.

Similarly, as noted by the 137th Law Commission, the Employees’ Provident Fund (EPF) Act, 1952, creates a separate line of succession, excluding certain legal heirs under personal laws if no nominee is specified. This exception further underscores a departure from conventional inheritance principles.

While some high court rulings have supported the notion of nominees as owners, these judgments were later declared per incuriam—decisions made without considering binding precedent.

Supreme Court ruling

In its December 14, 2023, ruling, the Supreme Court clarified the status of nominees under the Companies Act of 1956/2013, specifically for mutual fund (MF) units not mentioned in a testator’s will. The court reaffirmed the nominee’s role as a trustee, referencing provisions in the MF regulations, the Depositories Act, and other financial statutes.

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The ruling also explored the differences in how nomination clauses are worded across various statutes—terms like “non obstinate,” “vests,” and “notwithstanding”—and considered the constitutional and legal precedents underpinning these provisions.

Importantly, the Court ruled that, in addition to bank deposits, nominees for insurance policies and National Savings Certificates (NSC) are also considered trustees. For insurance policies, the Court referred to its own 1983 judgment but did not address the 2015 amendments to the Insurance Laws. For NSCs, the 1959 Act was repealed in 2018, and NSCs are now governed by the Government Savings Promotion Act of 1873, which the Court did not delve into in detail.

Thus, under current law, nominees continue to be trustees, not owners, as upheld by the Supreme Court.

However, the ruling did not address an important provision in the Government Savings Promotion Act of 1873, which, since April 2018, allows depositors in government savings schemes (SSS) to choose whether their nominee is an owner or a trustee. 

This raises the question of whether the Supreme Court’s ruling would still apply if an SSS depositor had designated their nominee as the owner.

Cultural differences also play a role in this issue. In Europe, harsh winters led to a culture of diary writing and meticulous record-keeping, which contributed to the development of the legal will. In contrast, in warmer countries like India, where oral traditions prevail, the concept of a nominee as a trustee rather than an owner is more difficult for the public to accept.

Imposing imported legal norms without accounting for local customs has led to confusion. The notion of a nominee being a mere trustee contradicts the law’s intent and complicates an otherwise straightforward process of asset succession.

For the average Indian, the idea that a nominee should only act as a trustee—rather than being an outright owner—remains difficult to grasp, particularly when the law already provides a clear route for succession via nomination.

The way ahead

The Legislature has the opportunity to empower citizens by amending laws governing financial assets to adopt the SSS model of nomination. Additionally, a third mode of succession, explicitly through nomination, could be introduced, exempting these financial products from traditional succession laws. This change would help reduce court congestion from nominee-versus-successor disputes, offering a public benefit.

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Consumers seeking a straightforward succession process could designate their nominee as the owner, while those preferring the formalities of a will could maintain the nominee as a trustee.

Could we expect a proposal on this issue in the upcoming Union budget?

S. Manjesh Roy works in the financial sector. The views and opinions expressed are personal.