NOMINEE- BENEFICIAL OWNER OR MERELY A CUSTODIAN / TRUSTEE OF SHARES

The concept of a nominee shareholder has been subjected to various debates since years as its fundamental interpretation has always been questioned and disputed by many. The answer with respect to its interpretation carries significant implications for various purposes of corporate governance, inheritance, succession, taxation, compliance, etc.

A nominee is a person or entity who is ‘nominated’ by the shareholder, to hold his shares after his death as a caretaker/custodian, not necessarily as the owner. A nominee therefore-

• Has a fiduciary duty towards the shareholder and the beneficial owners/legal heirs and hence the nominee must act in the best interests putting their interests above his own.
• The nominee must act in accordance with the instructions of the beneficial owners or legal heirs as the case maybe, being the trustee under law.

There however can be a situation where a nominee may appear to act as the true owner i.e. when clear documentation with respect to the beneficial owner is not available or not provided. In such cases, the nominee’s position may temporarily resemble that of an owner, though this is often dependant on facts and circumstances of each case.

Nominee shareholder has a vital role to play including but not limited to proxy voting, acting in the best interests of the legal heirs/beneficiaries, compliance under law, keeping the beneficial owners well informed and updated on the developments taking place within the company etc.

A few responsibilities of a nominee shareholder are- 

1. Hold shares on behalf of legal heirs/beneficiaries- The most crucial role of a nominee shareholder is to hold shares on “behalf” of the beneficial owners as a custodian. The beneficial owners may be the legal heirs (in case there is no Will left by the deceased) or the beneficiaries (as stated in the Will, if one exists).
2. Act in accordance with the interests of the shareholder & beneficial owners- A nominee holds a fiduciary responsibility towards the beneficial owners. The nominee therefore should vote as a proxy, in accordance with the duty of care, caution and the best of their interests. Nominee shareholders are also responsible for ensuring that the compliance with relevant laws and regulations, have been met from time to time.
3. Keep the beneficiaries/legal heirs informed- Nominee shareholder is the direct link between the company and the beneficial owner and should make sure that all the necessary information, details, announcements, instructions, financial data etc. are circulated to the beneficial owners. 

Under the applicable provisions of law, including Section 72 of the Companies Act, 2013 and established judicial precedents, a nominee does not become the absolute owner of the securities upon the death of the shareholder. The nominee merely acts as a custodian or trustee of the shares for the benefit of the legal heirs of the deceased.

The rights of succession to the estate of the Deceased are governed by the applicable personal succession laws, and not overridden by nomination. The nominee holds the securities in trust and is obligated to transfer them to the rightful legal heirs. Therefore, any action by any company in transferring ownership of shares or releasing proceeds exclusively to the nominee, without due consideration of the claims of legal heirs, is contrary to law and infringes upon the legitimate rights of the successor. The Hon’ble Supreme Court of India in para 35 & 38 in Shakti Yezdani & Anr. Versus Jayanand Jayant Salgaonkar & Ors., CIVIL APPEAL NO. 7107 OF 2017 has held as under:

“ 35. In the context of the facts of the present case, S. 109A of the Companies Act (pari materia to S. 72 of the Companies Act, 2013) provides for vesting of shares/debentures of a share/debenture holder unto his nominee ‘in the event of his death’. Similarly, Bye-law 9.11.1 under the Depositories Act, 1996 provides for ‘vesting’ of the securities unto the nominee on the death of the beneficial owner. Applying the law laid down in the aforenoted decisions of this Court, the use of the word ‘vest’ does not by itself, confer ownership of the shares/securities in question, to the nominee. The vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 is only for a limited purpose, i.e., to enable the Company to deal with the securities thereof, in the immediate aftermath of the shareholder’s death and to avoid uncertainty as to the holder of the securities, which could hamper the smooth functioning of the affairs of the company”.

“38. ……….Therefore, the purpose of invoking such a non-obstante clause is clearly delineated and limited to the extent of enabling the depository to deal with the securities, in the immediate aftermath of the securities holder’s death. The upshot of the above discussion is that the non- obstante clause in both S. 109A(3) of the Companies Act, 1956 & Bye-law 9.11.7 of the Depositories Act, 1996 cannot be held to exclude the legal heirs from their rightful claim over the securities, against the nominee”.

It can therefore be concluded that a nominee is generally not the beneficial owner, rather a custodian or trustee who holds the shares on behalf of another. While the nominee holds the share, ownership is limited and subject to fiduciary obligations towards the beneficial owners and legal heirs. The beneficial owner remains the true economic stakeholder.