Demat account and MF Folio nominations: Are you addressing these most important things?

Treasure Hunt, anyone?

No, we are not talking of the game where one plays the detective, nose to the ground, sniffing out hidden riches through clues.

We are talking of looking for unclaimed assets that may rightfully be ours, but without helpful clues. A different ball game altogether.

Surprisingly, while the importance of enabling smooth transition of one’s assets to one’s heirs/nominees is widely accepted, not much action is happening on the ground, in this regard.

A recent survey conducted by SEBI indicates that only 27.5 per cent of the singly-held demat accounts had nominations. Absence of a nominee makes the claim of assets by legal beneficiaries a  challenging process. As per SEBI, incomplete or unavailable nominations is one of the primary factors contributing to increase in unclaimed assets.

After repeated deadline extensions for completing the nomination procedure for demat accounts and mutual fund folios — the latest cutoff date being June 30, 2024 — SEBI came up with a consultation paper on the subject, on February 2, 2024.  

The consultation paper has certain proposals regarding revising and revamping the nomination facilities for demat accounts, mutual funds held in Statement of Account (and not in demat) form as well as units of AIFs held in physical form. Here is an explainer on the prevailing nomination facilities and rules, the issues surrounding nominations, and SEBI’s initiatives to resolve them.  

Basics of nomination

Nomination enables the owner of an asset to propose a person who can claim the units, or the redemption proceeds, in the event of his/her death. A nominee acts as a custodian (caretaker) of the asset in the event of death of the investor (original owner). In case of demat accounts and mutual fund folios, a maximum of three nominees can be appointed. A minor is also allowed to be appointed as nominee; but in that case, a guardian also has to be named.

Each nominee can be assigned any percentage of the investment. Where there is no such specification, each nominee shall be assigned equal portion of investment. Changes in nomination can be made at any point in time. Apart from an individual, nomination can also be made in favour of the Central government, State government, a local authority, any person designated by virtue of his/her office or a religious or charitable trust. Do note, a company/body corporate, partnership firm, Hindu Undivided Family (HUF), society or a trust (other than a religious or charitable trust) can’t become a nominee.

Having a designated nominee helps pass on the investments to near and dear ones in the event of death of asset owner. The absence of nomination can throw the beneficiaries into a tangle of legal complexities before they can claim the asset eventually. Considering its importance, SEBI earlier came out with a circular mandating investors to complete the nomination process in their demat accounts and mutual fund folios. This means that the investor either has to make nominations  for his/her mutual fund folio or demat account or he/she can opt out of nomination by signing a declaration form.

Failing the revised nomination deadline (June 30, 2024) can lead to your investment folios and demat accounts being frozen, thereby preventing you from making withdrawals or fresh investments until certain details are provided. The main aim here was that the market regulator wanted investors to consciously look into who should enjoy their hard-earned money after them, and make it easier for the claimant.

Do remember that becoming a nominee won’t necessarily provide ultimate ownership in case the original investor dies, especially in case of a conflict. In such circumstances, the Will shall be considered the final deciding factor and would supersede any nomination.

Further, the claim process differs as per the claimant. In case of a joint account, after the death of the first holder, MF units or securities in the demat account shall be transferred to the other surviving holder(s). In the event of demise of all holders of joint account, units can either be transferred to the nominee(s) or to the legal heirs if nomination is not made. In case of a singly-held account, the units shall be transferred to the nominee, or to the legal heir if there is no nominee.       

Hurdles in the way

SEBI’s survey reveals that while only 27.5 per cent of the single demat accounts have nominations, a big 70 per cent have ‘opted out’ of doing it. (See table for details of single/joint holding in mutual funds and demat accounts).

Nomination might not be given the required attention by retail investors due to lack of awareness about it. Second, information in the public domain suggests that though the process is getting online, the paper mode is still largely preferred by investors. Third, even if nomination is made during account opening process, investors don’t revisit the same regularly. It is important to review the nomination details on a periodic basis due to changing circumstances in the course of one’s life as well as situations where a nominee may pre-decease the actual owner. These apart, there are a few other issues, as enumerated below:  

Incapacity: While a lot of focus has been on the transmission of assets post the death of an investor, what has not gained much attention is accessing an investor’s investments while he/she is alive but incapacitated i.e. mentally or physically unfit to manage his/her own financial affairs. There have been instances where the asset owner has gone into a coma and there is a need to pay for the treatment but his/her assets are frozen. In such cases, transferring assets or becoming a guardian of that particular individual becomes challenging as there is no standard procedure for such a situation. While guidelines are in place regarding how a nominee should function in case the owner is deceased, there is no clarity in case of incapacitation.

Cap on number: Further, there is a cap on number of individuals one can nominate. While a maximum of three nominees — currently allowed for mutual funds and demat accounts — might work for most cases, there could be instances where someone may wish to nominate multiple people.

KYC for joint holder: Often it happens that in case of joint holding nature of ownership, upon the death of one of the joint owners of the demat account or mutual fund folio, the surviving joint holder(s) need to go through the KYC documentation process while transferring the assets. This happens despite the fact that it would have already been completed during the account opening procedure. This makes the transmission process cumbersome.

SEBI initiatives

Here are some of the steps initiated by SEBI in its consultation paper to simplify the nomination process for investors.

#1. To provide flexibility, SEBI has proposed to remove the currently placed cap on the number of nominees for demat account and mutual fund account holders. As per SEBI, the current limit of three nominees should be increased to very high two digits or to very high three digits (i.e 99 or 999), so that investors can make as many nominations as they wish.

#2. There are certain relief measures for the joint holder. SEBI has clarified that KYC documentation of the surviving joint holders won’t be required upon death of a unit holder. This is because the KYC would have already been done. Further, while it is mandatory for single holders to complete the nomination process, the case is not the same with joint holders.

#3. SEBI has proposed allowing nominees to conduct transactions on behalf of investor if he/she is temporarily or permanently incapacitated. While a single nominee is authorised to conduct transactions, in case of multiple nominees, the asset owner can specify a particular nominee beforehand for such purposes. A documentation procedure for authorisation is proposed for the same in the consultation paper. The procedures differ based on whether the incapacitated investor has capacity to contract or not. 

#4. In October 2023 SEBI unveiled a proposal to bring in a centralised mechanism of reporting the demise of investor to make the transmission process smoother. Currently, post the death of an asset owner, the joint holder or the nominee has to update the details regarding the same to every single entity where one’s investments lie, which might include fund houses, PMS, AIFs and brokerages. Since the processes and documentation requirement might differ across assets/products, dealing with different entities becomes challenging.  Through the proposed centralised mechanism, once the joint holder or the nominee or a family member reports an investor’s demise to a SEBI-regulated entity, the same will be updated across all these entities, providing huge relief to the surviving near and dear ones.

#5. Further, at times there may be cases where an investor might struggle to identify suitable guardian, which makes it difficult to make nominations when the proposed nominees are minors. Currently, if a minor is named a nominee, it is mandatory to appoint a guardian. The challenge to appoint a guardian might arise in case both joint holders are spouse themselves and thereby they might refrain to nominate. Also, considering the fact that minor might turn major over the course of the investor’s life and eliminating the need for guardians, SEBI has proposed to make appointment of a guardian nominee optional. Further, if there is a need to transfer or sell the assets when the nominee is still a minor, a guardian shall be appointed under an appropriate Act.

The proposals in the consultation paper seek to enhance the existing nomination and transmission process. Further, comments have been invited from industry players by March 8 before the implementation.

It remains to be seen how the proposals and mechanism get executed on ground. In the meantime, if you haven’t made nominations yet, don’t wait till June 30. Act now!