Recently, the Supreme Court, in the case of Shakti Yezdani & Anr. vs Jayanand Jayant Salgaonkar & Ors, held that a nomination in respect of shares of a company does not vest absolute legal ownership over the shares in favour of a nominee. With this decision, the Supreme Court has set to rest the confusion and uncertainty over this issue in view of the decision of the Bombay High Court on effect of nomination for shares of a company and various prevailing decisions on this subject, under other laws.

This case pertains to a nomination made by Mr Salgaonkar in favour of certain individuals and entities ('Nominees') in respect of his mutual fund investments/shares in a company. Mr Salgaonkar had also made a Will in respect of his properties. In the suit filed for administration of his properties, the Nominees claimed absolute ownership rights over the subject investments/shares to the exclusion of his legal heirs. The Nominees claimed that the nomination in their favour vested an absolute right of ownership, notwithstanding the succession laws. The Nominees placed reliance on the decision of the Bombay High Court in Harshada Kokate V/s Saraswat Co-op Bank and Ors ('Kokate case'). In Kokate case, the Bombay High Court had held that, having due regard to the special provisions introduced in the Companies Act 1956 and the bye laws under Depositories Act, the rights of the nominee are akin to a testamentary disposition and accordingly the nominees would acquire an absolute legal ownership over the shares with a right to deal with the same in any manner.

In the abovementioned Suit for administration, the Court did not accept the submissions of the Nominees and also observed that the judgment of the Bombay High Court in the Kokate case is per incuriam, i.e. without having due regard to the then prevailing relevant Court rulings on the subject and therefore is not a correct and binding decision. On an appeal, the division bench of the Court upheld this order of the Court. On challenge by Nominees, this matter eventually reached Supreme Court. The Supreme Court formulated the following key issues for its evaluation:-

  1. the scheme, intent and object behind the Companies Amendment Act whereby provisions regarding nomination where introduced.
  2. Effect of use of the term 'vest' and presence of non-obstante clause in Companies Act 1956 amended as above.
  3. implications of nomination under Companies Act 1956 vis-à-vis other comparable legislations and laws of succession.

On evaluation of the respective provisions of the Companies Act, the statement and objects thereof as well as of the amendments introduced to the Companies Act, effect of nomination under various other legislations, the prevalent Court rulings on the subject under the Companies Act as well as the other legislations, the Supreme Court concluded as follows:

  1. There is no material to show that intention behind introducing nomination provisions under Companies Act was to confer absolute title to the shares in favour of nominees. The Companies Act 1956 does not deal with the laws of succession but with the matters relating to the affairs of a corporate. Accordingly, a provision in the Companies Act cannot be given a wider meaning so as to override the succession laws and nomination cannot be countenanced as 'statutory testament'.
  2. Use of the term 'vesting' or an overriding non-obstante clause in amending provisions, are not intended to grant ownership rights over the shares in favour of the nominee. Certain other pari materia (i.e. dealing with the same subject) legislations, also employ similar language. However, under all these legislations also, it is well settled position of law that nomination does not grant absolute ownership rights to a nominee.
  3. Use of the term 'vesting' by itself does not imply an absolute ownership but only a right to hold the shares. In multiple Court rulings, the term vesting has been interpreted to mean rights other than absolute ownership rights, having due regard to the respective provisions of law. This vesting provision is only intended to safeguard a company from being dragged into any issues or proceedings regarding succession. There is no third mode of succession that the scheme of the Companies Act, 1956 and Depositories Act, 1996 aims or intends to provide.
  4. The Courts have, over the years, provided consistent views on the subject and rights of a nominee, not being an absolute legal owner. A departure from this settled position of law is not at all warranted and can have major ramifications.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.