Supreme Court Ruling in Shakti Yezdani vs Jayanand Jayant Salgaonkar: Supreme Court Clarifies Nomination vs Succession Rights

Introduction

The Indian legal landscape witnessed a significant clarification in December 2023 when the Supreme Court of India delivered its landmark judgment in Shakti Yezdani & Anr vs Jayanand Jayant Salgaonkar & Ors [1]. This pivotal decision, rendered by a bench comprising Justice Hrishikesh Roy and Justice Pankaj Mithal, conclusively addressed the debate on Nomination vs Succession in corporate law. The Court held that a nomination under the Companies Act does not constitute an alternative mode of succession and reaffirmed that legal heirs retain superior rights over nominees in matters of asset devolution.

Background and Facts of the Case

The dispute in Shakti Yezdani vs Jayanand Salgaonkar centered around the conflict between nomination vs succession in relation to the estate of Mr. Jayant Shivram Salgaonkar, who had executed a will on June 27, 2011, outlining the devolution of his properties upon his legal heirs. The testator possessed substantial assets, including fixed deposits worth Rs. 4,14,73,994 and various mutual fund investments. In line with financial practice, he had appointed nominees for these assets under the provisions of the Companies Act, 1956, and the Depositories Act, 1996.

Following the testator’s death, a complex legal battle ensued between the nominees and the legal heirs. The appellants, who were the appointed nominees, claimed absolute ownership over the mutual fund investments and securities, arguing that the nomination provisions under Section 109A and 109B of the Companies Act, 1956, and bye-law 9.11.7 of the Depositories Act, 1996, vested them with complete ownership rights to the exclusion of all other parties [2].

The legal heirs, represented by respondents 1 to 9, contested this claim, arguing that the testator’s will, executed in accordance with the Indian Succession Act, 1925, should govern the distribution of assets. They maintained that the nomination was merely a facility for ease of transmission and did not confer absolute ownership rights upon the nominees.

Legal Framework Governing Nominations and Succession

The Companies Act Provisions

The Companies Act, 2013, under Section 72, provides for the power of nomination. This section states: “Every holder of securities of a company may, at any time, nominate, in the prescribed manner, any person to whom his securities shall vest in the event of his death” [3]. The corresponding provision in the Companies Act, 1956, was contained in Sections 109A and 109B, which established similar nomination mechanisms.

The critical language of “vesting” in these provisions had created ambiguity regarding whether nominees acquired absolute ownership or merely held assets as trustees for the legal heirs. The appellants in this case argued that the use of terms like “vesting” and “to the exclusion of others,” coupled with the non-obstante clause in the Companies Act, 1956, distinguished corporate nominations from other legislative frameworks and conferred absolute ownership rights.

Indian Succession Act, 1925

The Indian Succession Act, 1925, governs the devolution of property upon death and provides the legal framework for wills and intestate succession [4]. Under this Act, a validly executed will determines how a deceased person’s assets should be distributed among beneficiaries. The Act establishes the primacy of testamentary disposition over other modes of property transmission.

Section 2(f) of the Indian Succession Act defines “will” as the legal declaration of the intention of a testator with respect to his property, which he desires to be carried into effect after his death. The Act provides detailed provisions for the execution, probate, and administration of wills, ensuring that the deceased’s testamentary intentions are respected and legally enforced.

Hindu Succession Act, 1956

For Hindu individuals, the Hindu Succession Act, 1956, provides an additional layer of succession rights [5]. This Act governs intestate succession among Hindus and establishes the order of inheritance when no valid will exists. Even when nominations exist, the Act’s provisions regarding legal heirs’ rights remain relevant in determining ultimate ownership of assets.

Supreme Court’s Analysis and Reasoning

Nomination vs Succession: Limits of Corporate Law

The Supreme Court categorically held that it is beyond the scope of corporate law to facilitate succession planning of shareholders. The court emphasized that companies and their regulatory frameworks are not intended to determine inheritance rights, which fall within the domain of personal laws and succession statutes [6].

The bench observed that allowing corporate nominations to override succession laws would create an unintended third mode of succession, which was never the legislative intent behind nomination provisions. The court noted that nomination provisions were designed as administrative conveniences to ensure smooth transfer of securities without creating new succession rights.

Interpretation of “Vesting”

One of the most significant aspects of the court’s analysis was its interpretation of the term “vesting” used in the Companies Act provisions. The appellants had argued that this language conferred absolute ownership rights upon nominees. However, the Supreme Court clarified that “vesting” in this context means only temporary holding of assets, not ownership.

The court distinguished between legal possession and beneficial ownership, holding that while securities may vest in the nominee for administrative purposes, the beneficial ownership remains with the legal heirs as determined by succession laws. This interpretation aligns with the trustee principle, where the nominee holds assets on behalf of the rightful beneficiaries.

Rejection of Alternative Succession Mode

The Supreme Court firmly rejected the contention that nomination provisions create an alternative mode of succession. The court held that there are only two recognized modes of succession in Indian law: testamentary succession (through wills) and intestate succession (through personal laws). Corporate nominations cannot constitute a third mode of succession that bypasses established succession principles [7].

This ruling provides much-needed clarity to the legal framework, eliminating the confusion that had existed regarding the status of nominees vis-à-vis legal heirs in matters of asset inheritance and clearly defining the legal boundaries in nomination vs succession disputes.

Implications for Financial Instruments and Securities

Mutual Funds and Investment Securities

The judgment has significant implications for the mutual fund industry and securities market. Investors who have appointed nominees for their mutual fund holdings and demat accounts should understand that nominations serve primarily as administrative conveniences for the transmission of assets after death, rather than determinants of ultimate ownership.

Asset management companies and registrars and transfer agents must now ensure that their processes align with this clarification. While nominees can claim assets for administrative purposes, they must ultimately distribute them according to succession laws and valid wills.

Banking and Deposit Relationships

Although the specific case dealt with mutual funds, the principles established have broader implications for banking relationships and fixed deposits. The judgment reinforces that bank nominees similarly hold deposits in trust for legal heirs, rather than acquiring absolute ownership rights.

Financial institutions must review their documentation and processes to ensure that customers understand the limited nature of nomination rights and the continuing importance of proper will-making and succession planning.

Regulatory Framework and Compliance Requirements

SEBI Regulations and Market Practice

The Securities and Exchange Board of India (SEBI) regulations have traditionally required the nomination facility for various financial instruments. The Supreme Court’s judgment does not invalidate these requirements but clarifies the legal effect of such nominations. Market participants must continue to comply with SEBI’s nomination requirements while understanding their limited legal effect [8].

Depositories Act Implications

The Depositories Act, 1996, and its accompanying bye-laws had created similar ambiguities regarding nominee rights. The Supreme Court’s ruling clarifies that bye-law 9.11.7 and similar provisions should be interpreted consistently with succession law principles, ensuring that nominees understand their role as temporary custodians rather than absolute owners.

Practical Implications of Nomination vs Succession in Estate Planning

Will Drafting and Succession Planning

The judgment underscores the critical importance of proper will drafting and succession planning. Individuals cannot rely solely on nominations to ensure their desired asset distribution after death. Instead, they must execute valid wills under the Indian Succession Act, 1925, or ensure that their succession preferences align with applicable personal laws.

Estate planning professionals must advise clients that nominations should complement, not replace, proper testamentary planning. The interplay between nomination provisions and wills requires careful consideration to avoid conflicts and ensure smooth asset transmission.

Family Disputes and Litigation

The ruling is expected to reduce litigation between nominees and legal heirs by providing clear guidance on their respective rights. Families can now approach succession matters with greater certainty, knowing that legal heirship rights cannot be defeated merely by nomination appointments.

However, the judgment also emphasizes the importance of clear communication within families regarding succession planning, as nominees may still face practical difficulties in understanding their limited rights without proper legal guidance.

International Perspectives and Comparative Analysis

Common Law Jurisdictions

In common law jurisdictions like the United Kingdom and Australia, similar principles govern the relationship between nominated beneficiaries and legal heirs. The concept of the nominee as a trustee rather than absolute owner is well-established in these legal systems, and the Indian Supreme Court’s approach aligns with international best practices.

Civil Law Systems

Civil law jurisdictions in continental Europe have traditionally maintained strict succession laws that limit testamentary freedom and recognize forced heirship principles. The Indian approach, which prioritizes succession laws over contractual nomination arrangements, shows similarities to these systems’ emphasis on legal succession rights.

Future Legal Developments and Legislative Considerations

Potential Amendments to Corporate Law

While the Supreme Court has provided clarity on the current legal position, there may be scope for legislative amendments to address practical concerns arising from the judgment. Parliament could consider whether explicit provisions are needed to further clarify the trustee role of nominees and establish standardized procedures for asset transmission.

Regulatory Response

Financial sector regulators, including SEBI, the Reserve Bank of India, and the Insurance Regulatory and Development Authority, may need to review their regulations and guidance documents to align with the Supreme Court’s pronouncement. This may involve updating forms, procedures, and customer education materials.

Conclusion 

The Supreme Court’s decision in Shakti Yezdani vs Jayanand Jayant Salgaonkar represents a watershed moment in Indian succession and corporate law. By definitively establishing that nomination provisions do not override succession laws, the court has provided much-needed clarity to a contentious area of law that had generated significant litigation and uncertainty, settling the long-debated issue of Nomination vs Succession.

The judgment reinforces the fundamental principle that succession rights are governed by personal laws and testamentary instruments rather than administrative conveniences created by corporate legislation. By doing so, the Court provides much-needed clarity on the debate of Nomination vs Succession, ensuring that while nomination serves as a practical mechanism for asset transmission, it cannot override the superior rights of legal heirs under succession laws.

For practitioners, financial institutions, and the investing public, the ruling necessitates a renewed focus on proper succession planning and will-making. While nominations remain important for administrative efficiency, they cannot substitute for proper testamentary planning under the Indian Succession Act, 1925, and applicable personal laws.

The decision is expected to have lasting implications for estate planning practice, financial sector operations, and succession law jurisprudence in India. It stands as a testament to the Supreme Court’s role in clarifying complex legal issues and ensuring that statutory provisions are interpreted consistently with underlying legal principles and legislative intent.

Moving forward, individuals, families, and financial institutions must adapt their practices to align with this authoritative pronouncement, ensuring that succession planning encompasses both nomination facilities and proper testamentary instruments to achieve desired outcomes while respecting established legal principles.

References

[1] Shakti Yezdani & Anr vs Jayanand Jayant Salgaonkar & Ors, 2023 SCC OnLine SC 1679. Available at: https://indiankanoon.org/doc/166607072/ 

[2] LiveLaw. “Nomination Process Under Companies Act Does Not Override Succession Laws: Supreme Court.” December 22, 2023. Available at: https://www.livelaw.in/supreme-court/supreme-court-ruling-companies-act-nomination-process-does-not-override-succession-laws-245146 

[3] The Companies Act, 2013, Section 72. 

[4] The Indian Succession Act, 1925. Available at: https://www.indiacode.nic.in/handle/123456789/2385?locale=en 

[5] The Hindu Succession Act, 1956. Available at: https://ncwapps.nic.in/acts/TheHinduSuccessionAct1956.pdf 

[6] Lexology. “Supreme Court Clarifies – Nomination Under The Companies Act Does Not Create A Third Mode Of Succession.” December 28, 2023. Available at: https://www.lexology.com/library/detail.aspx?g=ae87e753-9b02-46fe-9034-ae707308cefd 

[7] The Amikus Qriae. “Case Comment: Shakti Yezdani v. Jayanand Jayant Salgaonkar (2023).” September 15, 2024. Available at: https://theamikusqriae.com/case-comment-shakti-yezdani-v-jayanand-jayant-salgaonkar-2023/ 

[8] Cyril Amarchand Mangaldas Private Client. “Nomination v. Succession – SC Finally Settles the Debate.” February 6, 2024. Available at: https://privateclient.cyrilamarchandblogs.com/2024/02/nomination-v-succession-sc-finally-settles-the-debate/