Monday, May 3, 2010

Right of Nominee versus Right of Heir: Transmission of ownership of shares through nomination

The Bombay High Court in the case of Harsha Nitin Kokate v.The Saraswat Co Op. Bank Ltd. & Ors put to rest the debate involving inheritance of shares by heirs and the legal right over the shares through nomination in consonce with section 109A of the Companies Act,1956. The application of a widow was therefore dismissed by the Court who held that the legal right and title of the shares after the death of the shareholder( the applicants husband in this case) would be with the nominee of the shareholder and not with the heir of the shareholder.

In the instant case the applicant, the widow of the shareholder filed a suit for an interest in the shares which she claimed to have sold. The court affirmed that the foremost question in the instant case was whether the applicant had any legal right or title over such shares.
Her husband proir to his death in 2007 had made his nephew the nominee to the shares in the prescribed form of the Depository Participant. The effect of S.109A therefore results in vesting absolute rights of the nominee over the shares, notwithstanding other laws being in force. Consequent to the dematting of shares in 1996, the amendment in 1998 resulted in the inclusion of Sec.109A to govern nomination of shares. Shares being intangible movable property which can be bequeathed through word of mouth or over the internet result in transfer of rights over these with the change in holders. Therefore it became important for the inclusion of S.109A governing nomination. Furthermore in accordance with S.9.11 of the depositories Act,1996, which relates to the Transmission of Securities in the case of nomination, the shares automatically get transferred to the nominee so appointed on the death of the Nominating person.Consequently such nomination comes into effect notwithstanding anything contained in a testimentory disposition or any other nomination under any other law relating to securities at the time being in force.
The counsel for the plaintiff argued that the nominee would serve only as a trustee for the shares and thus the plaintiff being the widow of the deceased is entitiled to the right over these shares. However the Court went on to further disagree and concluded that it is the property of the shares which has been transferred along with exclusive rights of ownership. The Court further lay stress on the term 'vest' used in the statutory provision of the Companies Act as well as S.9.11 of the Depositories Act,1996 and concluded that the term has to be interpreted in the light of S. 109A to mean that the right and title over the property of the shares along with the absolute ownership belongs with the nominee. The use of the term 'vest' in other legislations as used in S.39 of the Insurance Act denotes the right to receive payment of the policy without conferring absolute ownership in the nominee.Thus the court acknowledged the right of the nominee over the property of the shares in consonance with s,109A of the Companies Act,1956 and dismissed any right of the plaintiff over such shares of the deceased husband.

The judgement has conclusively detremined the application and ambit of the S.109A of the aforementioned Act so far as a nomination has been made with regard to transmission of shares. Further it has dismissed any presumption which would prevent the nominee from absolute ownership of the shares.

1 comment:

  1. Hello Avantika

    Is there a supreme court precedent in this regard. as the decision of the bombay high court would only be deemed law in its respective state jurisdiction.

    ReplyDelete