Nomination Process Under Companies Act, 2013

KEY TAKEAWAYS

5. The Companies Act, 2013 contains various provisions that aim to regulate different aspects of corporate law in India.
5. Under Section 72 of the Companies Act, 2013, holders of shares and debentures of a company can nominate a person to whom the shares and debentures would vest on the demise of the holder of shares or debentures.
5. Nomination, enables a shareholder to provide sufficient directions to a company with regard to disposal or transmission of shares held by him in the event of his death.

INTRODUCTION

The Companies Act, 2013 is an act passed by the Indian Parliament on 29 August 2013. It is a comprehensive legislation that governs various aspects of corporate law in India. The act replaced the earlier Companies Act, 1956. Under Section 72 of the Companies Act, 2013, holders of shares and debentures of a company can nominate a person to whom the shares and debentures would vest on the demise of the holder of shares or debentures. The Companies Act of 2013 permits shareholders to nominate individuals to receive their shares in the event of their death. This nomination is a written instruction given by the shareholder to the company, specifying the person who will inherit the shares. This designated individual is referred to as the nominee. The nomination process is beneficial as it allows the company to identify a single legal representative for the deceased shareholder, thereby avoiding potential conflicts among multiple legal heirs. Additionally, it eliminates the need to navigate through inheritance disputes that may arise. In this article, we look at shareholder nomination and the procedure for filing SH-13.

OBJECTIVES OF THE COMPANIES ACT, 2013

1. To promote transparency, accountability, and efficiency in the corporate sector.

2. To protect the interests of shareholders and stakeholders.

3. To encourage investment and economic growth.

4. To provide a fair and transparent framework for the registration and regulation of companies.

5. To facilitate the closure of companies in cases where they are no longer viable.

KEY PROVISIONS

The Companies Act, 2013 contains various provisions that aim to regulate different aspects of corporate law in India. Some of the key provisions include:

1. Registration and Incorporation: The act outlines the procedures for registering and incorporating a company. It also provides for different classes of companies, including private and public companies.

2. Share Capital and Debentures: The act specifies the minimum amount of authorized share capital and the maximum number of shares that can be issued by a company. It also regulates the issuance of debentures and the rights of debenture holders.

3. Meetings and Board Resolutions: The act establishes the rules and regulations for conducting board and annual general meetings of companies. It also provides for the recording of minutes and ensuring compliance with corporate governance norms.

4. Audit and Accounts: The act requires companies to maintain proper financial records and appoint auditors to audit their accounts. It also specifies the qualifications and responsibilities of auditors.

5. Directors and Officers: The act provides guidelines for the appointment of directors, their powers and responsibilities, and their removal. It also imposes penalties for non-compliance with corporate governance norms.

6. Stakeholders' Rights: The act recognizes the rights of shareholders, including the right to receive information, participate in the management of the company, and file grievances. It also provides for the protection of minority shareholders.

7. Company Winding-up and Liquidation: The act outlines the procedures for winding-up and liquidation of companies, including the appointment of liquidators and the disposal of assets. It also provides for the settlement of claims of creditors and shareholders.

8. Corporate Social Responsibility: The act encourages companies to adopt socially responsible practices, including environmental conservation and fair treatment of employees. It also requires companies to disclose certain information about corporate social responsibility activities.

POWER TO NOMINATE: SECTION 72

Shares of a company are freely transferable assets under law. A shareholder, during his lifetime, is free to transfer shares held by him in a public company subject to reasonable restrictions, if any, imposed under the Articles of Association. Nomination, enables a shareholder to provide sufficient directions to a company with regard to disposal or transmission of shares held by him in the event of his death. The subsections of section 72 provides as follows:

(1) Any individual who holds securities in a company has the right to nominate another person, following the specified procedure, to inherit those securities in the event of their death.

(2) In cases where multiple individuals jointly hold securities in a company, they have the ability to collectively nominate, according to the prescribed procedure, a person who will inherit all the rights to those securities in the event of the death of all joint holders.

(3) Regardless of any other laws or arrangements, such as wills, pertaining to the securities of a company, if a nomination made in the prescribed manner grants a person the right to inherit the securities, that nominee will become entitled to all the rights associated with those securities upon the death of the securities holder or joint holders. This entitlement will exclude all other individuals, unless the nomination is modified or revoked following the prescribed procedure.

(4) If the nominated person is a minor, the securities holder who made the nomination has the legal authority to appoint, following the prescribed procedure, another person who will be entitled to the securities in the event of the nominee's death during their minority.

Filing Form SH-13

Form SH-13 is the required form for nomination according to the Companies (Share Capital and Debentures) Rules, 2014. Only individual holders can make nominations on their own behalf, and not through a power of attorney holder. If the shares, debentures, or deposits are held jointly, all joint holders must jointly execute the nomination form. The nominee can only be an individual and not a company or LLP.

Transfer of Shares based on Nomination

A company is required to maintain a Register of nominations that have been filed with and registered by the company. The contents of this register must be regularly updated and authenticated by the Company Secretary or any other authorized person designated by the board. Upon receiving notification of a shareholder's death, the company secretary must verify from the register whether the shareholder had filed a valid nomination. Once a valid nomination has been confirmed, the nominee has two options as specified in Rule 19 of the Companies (Share Capital and Debenture) Rules, 2014. The nominee can either have the shares registered in their own name or transfer the shares to another person, as the deceased shareholder could have done. If the nominee chooses to become a member of the company, they must inform the company in writing of their intention to do so. This notice must be signed and accompanied by the death certificate of the deceased shareholder. Stamp duty is not applicable in the case of transmission. If the nominee decides to transfer the shares, the transfer will be treated as if the death of the shareholder had not occurred. The transfer will be subject to all the procedures, restrictions, and limitations that apply to the transfer of shares by a shareholder under the Act. The nominee must submit a written instrument of transfer or transfer deed in the prescribed form SH-4 to the company. This instrument must be properly executed and adequately stamped. The transferee will acquire proper title to the transferred shares, subject to all the liabilities and restrictions associated with them. This option allows the nominee to dispose of the shares without the need to go through the complexities and responsibilities of being registered as a member of the company.

JUDICIAL PRONOUNCEMENTS

1. Ram Chander Talwar V Devender Talwar (2010) 159 CompCas 646

In this case the Supreme Court examined section 45AZ(2) of the Banking Regulations Act 1949. This section allows deposit holders to nominate someone who will inherit their deposits upon their death. The court clarified that this section does not make the nominee the owner of the deposit money, but rather places them in the position of the depositor after their death. The nominee is entitled to receive the deposited money as a trustee, but it is still considered part of the deceased depositor's estate. The Supreme Court emphasized that the Banking Regulation Act 1949 is focused on banking regulations and not succession laws. Therefore, the general law of succession will determine the distribution of the estate, while the nominee acts as a trustee. It is well-established that special laws, such as the Banking Regulations Act, take precedence over general laws. The rule set forth by the Supreme Court may also be applicable to nominations made under section 72 of the Act, even though the non-obstante clause and the term "vest" are used in this section.

2. Harsha Nitin Kokate vs The Saraswat Co-Op. Bank Ltd

In the 'Kokate Case', the Bombay High Court has made a significant departure from established practice regarding the transmission of shares. The court ruled that all ownership rights belong to the nominee rather than the legal heirs. The court's decision came in response to a petition filed by the plaintiff, who sought permission to sell shares held by her late husband. However, since she was not the nominee, the court determined that she had no ownership rights over the shares. The plaintiff's lawyer argued that as the heir of her husband, who died without a will, she should have ownership rights and be able to do as she wished with the shares. It was further claimed that the nominee had no legal ownership rights and was merely holding the shares in trust for the deceased's estate. However, the judge interpreted the word "vest" as granting exclusive ownership to the nominee, regardless of the claims of legal heirs.

It was held in the judgment that, “A reading of Section 109(A) of the Companies Act, 1956 (Now Section 72 of the Companies Act, 2013) 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed, as has been done in this case.”

3. Jayanand Jayant Salgaonkar v Jayashree Jayant Salgaonkar

The Bombay High Court, in this instance, ruled that nominations made under sections of the Companies Act cannot override the law of succession or establish an additional line of succession. The Justice further clarified that nominees can only act as trustees for the rightful legal heirs and beneficiaries mentioned in a will.

4. Dayagen (P) Ltd. v Rajendra Dorian Punj

In this case, it was held that, the company was wrong in transmitting the shares of the deceased shareholder in favour of the nominee, when a registered will of the deceased bequeathing shares in the legal heir’s favor had been presented. Since there was no dispute over the will, it was necessary for the shares to be rightfully transferred to the legal heir.

NOMINATION AND REMUNERATION COMMITTEE

The Nomination and Remuneration Committee plays a crucial role in establishing appropriate criteria for directors' qualifications, positive attributes, and independence. Additionally, it advises the Board on the remuneration policy for directors, key managerial personnel, and other employees. The formation of the Nomination and Remuneration Committee is explicitly outlined in Section 178 of the Companies Act, 2013, and the SEBI (LODR) Regulations, 2015, specifically in Rule 19.

There are certain mandatory requirements for the constitution of the committee, as per the Companies Act, 2013, and the SEBI (LODR) Regulations, 2015. These requirements apply to the following categories of companies:

1. Every listed public company

2. Public companies with a paid-up share capital of Rs. 10 crores or more

3. Public companies with a turnover of Rs. 100 crores or more

4. Public companies with net total outstanding loans, debentures, and deposits exceeding Rs. 50 crores

The committee must consist of a minimum number of directors, including at least three non-executive directors, out of which at least half should be independent directors, as per the provisions of the Companies Act, 2013. In the case of a listed entity with outstanding SR equity shares, at least two-thirds of the Nomination and Remuneration Committee should comprise independent directors, as per the SEBI (Listing Obligation and Disclosure Requirement) Regulation 2015. The Nomination and Remuneration Committee is required to hold at least one meeting per year. The chairperson of the committee should be an independent director. However, in the case of a listed entity, the chairperson may be appointed as a member of the committee but should not chair the committee.

ROLES AND RESPONSIBILITIES OF THE COMMITTEE

Firstly, it is responsible for deciding on the annual bonus, performance pay, and variable pay pool for both executives and non-executives within the company. Secondly, the committee is in charge of formulating and modifying schemes that provide perks and allowances for officers and non-executives, following the guidelines and directions set by the Government of India. Lastly, the committee is also responsible for carrying out any other roles assigned to it by the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015, as well as any other laws and their amendments that may arise over time.

CONCLUSION

The Companies Act, 2013 is a significant piece of legislation that governs corporate law in India. It aims to promote transparency, accountability, and the protection of stakeholders' interests. By implementing the provisions of this act, India aims to establish a robust legal framework for regulating the corporate sector and encouraging economic growth. Companies Act stipulates that in the event of the holder(s) passing away, the nominee of the company's securities shall inherit all the rights associated with those securities, to the exclusion of any other individuals. Consequently, upon the demise of an individual, the nominee assumes full entitlement to the rights pertaining to the shares and becomes the beneficial owner. This grants the nominee the authority to transfer, pledge, or retain the shares. As a result, all other individuals are excluded, and only the nominee is granted the rights to the shares as per the statutory provision.