Recently, the Supreme Court, in Shakti Yezdani vs JJ Salgaonkar, held that 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 the effect of nomination for shares of a company.

This case pertains to a nomination made by Salgaonkar in favour of certain individuals and entities (‘nominees’) in respect of his mutual fund investments/shares, apart from a will in respect of his properties. In the suit filed for administration of his properties, the nominees claimed absolute ownership rights over the investments/shares, to the exclusion of his legal heirs on the basis of the nomination. The nominees relied on Bombay HC decision in Harshada Kokate vs Saraswat Co-op Bank. In that case, the HC had held that, having due regard to the special provisions introduced in the Companies Act, 1956, and the by-laws under Depositories Act, the rights of the nominee are akin to a testamentary disposition and accordingly the nominees would acquire absolute legal ownership over the shares.

In the abovementioned suit for administration, the court did not accept the submissions of the nominees observing that the judgment in the Kokate case is per incuriam, i.e. dis-regarding the then prevailing relevant Court rulings on the subject, and therefore is not a correct decision.

This matter eventually reached the 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 were introduced, (2) effect of use of the term ‘vest’ and presence of non-obstante clause in Companies Act 1956 amended as above, and (3) implications of nomination under Companies Act 1956 vis-à-vis other comparable legislation and laws of succession.

On evaluation of the above provisions, effect of nomination under various other legislations, the prevalent court rulings, the Supreme Court concluded that there was 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.

It further noted that the Companies Act of 1956 does not deal with the laws of succession but with the matters relating to the affairs of a company. 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’.

Furthermore, the apex court said that the use of the term ‘vesting’ or an overriding non-obstante clause in amending provisions, is not intended to grant ownership rights over the shares in favour of the nominee.

Various courts have held that the term ‘vesting’ used in certain other pari materia (i.e. dealing with the same subject) legislation does not amount to absolute ownership.

This vesting provision is only intended to safeguard a company from being dragged into any disputes 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.

The Courts have, over the years, provided consistent views on such rights of a nominee not amounting to absolute ownership; a departure from which is not warranted and can have major ramifications.

(The author is Partner at Pioneer Legal, a law firm)