Sebi’s nominee rules revamp aim to simplify succession but raise new challenges

To address such scenarios, the Securities and Exchange Board of India (Sebi) has rolled out revamped rules that allow nominees to manage the accounts of physically incapacitated investors without requiring a power of attorney (POA). Announced on 10 January, these rules aim to provide families with a financial safety net. However, experts warn of limitations and potential challenges.

Easing access but with caveats

Sebi’s new guidelines allow single-holding investors to authorize one nominee (excluding minors) to operate their accounts if they are physically incapacitated but still mentally capable of contracting. Redemption proceeds are credited directly to the investor’s linked bank account.

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However, nominees cannot update key details such as bank accounts or contact information. Additionally, the provisions exclude investors in critical conditions, such as comas or on ventilators.

While this is one of several revamped rules designed to help mutual fund and demat account holders manage their investments during sudden illness or demise, experts warn that these rules could lead to unintended consequences.

“Redemption by a nominee operating on behalf of an incapacitated asset owner is prone to abuse; policing of the same could be a huge challenge for the Sebi and humongous work for the depository participants (DPs) and asset management companies (AMCs),” said Rajat Dutta, founder of Inheritance Needs Services.

This could lead to an increase in complaints filed through Sebi’s Complaint Redress System (SCORES), with online dispute resolution (ODR) becoming the logical recourse, Dutta said.

He also raised concerns about Sebi’s safeguard requiring redemption proceeds to be credited to the investor’s linked bank account. This offers little protection if the nominee is a joint holder in the linked account, Dutta noted.

Even genuine cases may face roadblocks. According to the Reserve Bank of India (RBI), banks require a POA or mandate to grant nominees access to funds. This misalignment between Sebi and RBI rules could leave families without recourse.

Certified financial planner Viresh Patel emphasized the need for regulatory harmonization.

“The issue will remain unresolved unless the RBI takes a similar stance on it. We need an aggregator regulator – acting as a bridge between all regulators from Sebi, RBI, Irdai (Insurance Regulatory and Development Authority of India), PFRDA (Pension Fund Regulatory and Development Authority), Cert-In (Indian Computer Emergency Response Team) or MeITY (Ministry of Electronics and Information Technology). The Ministry of Finance should consider forming a JPC (Joint Parliamentary Committee) so that wherever a law is amended, the JPC will recommend a change,” Patel said.

Succession challenges in joint holdings

Sebi’s revamped rules introduce complexities in joint ownership scenarios.

Consider a case where three siblings jointly hold an investment, and one sibling passes away. Even if the deceased sibling has bequeathed their share to a child in their will, Sebi’s rule states that the surviving joint holders, in this case the surviving siblings, automatically become owners of the deceased’s share.

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“How can surviving joint owner(s) become the owner of the designated share of the deceased joint holder? Can Sebi as a regulator override the legacy and succession plan formulated by the asset owner? This lacks clarity,” said Dutta.

Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors, advises investors to carefully consider joint holders. “If the intent is not to give your assets to a particular friend or family member, avoid having them as joint holders.”

Another contentious rule comes into play when joint holders fail to nominate anyone and all of them pass away. In such cases, Sebi mandates that the legal heir of the youngest joint holder will inherit the entire investment. This can lead to disputes, especially when joint holders are not family members.

“Why should the legal heir of the youngest joint holder become the sole beneficiary of the entire investment? It is unfair to the heirs or beneficiaries of the other joint holders. Joint holders could also be business partners or friends. It will create unnecessary hurdles in the legacy and succession process. There is no clarity,” Dutta remarked.

Sebi has introduced new provisions for handling the transmission of joint accounts or folios to nominees. After the transmission, nominees can either continue as joint holders with other nominees or choose to open individual accounts or folios for their respective portions.

For accounts or folios with multiple nominees, Sebi clarified that when part of the account is transmitted to certain nominees while other portions remain unclaimed, the depository participant (DP) or asset management company must allow the unclaimed portion to remain in the existing account or folio. However, no transactions will be permitted in these accounts other than the eventual transmission to the remaining nominees.

To accommodate more diverse succession planning, Sebi now allows investors to nominate up to 10 individuals per account or folio—a significant increase from the earlier limit of three.

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By comparison, the RBI took six decades to expand its nomination system to four individuals through the Banking Laws (Amendment) Bill on 3 December 2024, while the Irdai permits three nominees.

This expansion makes Sebi unique among regulators, but it also comes with challenges, noted Dutta from Inheritance Needs Services. “This calls for huge software expenditure on part of DPs and AMCs. Asset owners will be confused as there is no parity among financial products,” said Dutta.

Plan Ahead Wealth Advisors’ Dhawan sees the expanded nomination limit as a way to reduce inheritance disputes. “Investors may want to distribute their wealth among a large number of people, but the limitation of having not more than three nominees puts a challenge. The solution lies in creating will, but not many people do it. The revamped rule will allow investors to have up to 10 nominees,” said Dhawan.

Streamlining documentation

The Sebi circular also simplifies the nomination process by standardizing requirements.

To nominate, investors must provide one of the following: a PAN, driving licence number, or the last four digits of an Aadhaar number (only the number, not the document itself). Additionally, nominees’ full contact details—residential address, email address, telephone/mobile number—along with their relationship to the investor and date of birth (if the nominee is a minor) are required.

For asset transmission to registered nominees, the regulated entity will only need a self-attested copy of the deceased investor’s death certificate and the nominee’s updated or reaffirmed KYC details. Sebi has emphasized that no additional documentation, such as affidavits, indemnities, undertakings, attestations, or notarizations, should be sought.

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This measure eliminates inconsistencies where AMCs previously enforced their own transmission rules, creating unnecessary hurdles for nominees.

To ensure readiness, AMCs and depositories must report their preparedness to Sebi by 20 February and implement the revised rules by 1 March.