SEBI’s new rules: Clarifying joint account ownership & nominee access for incapacitated investors

Imagine this scenario: A joint demat account or a mutual fund account is created with someone else. But what happens if one of the joint account holders passes away? Who gets the share of the deceased account holder—the surviving joint holder or the legal heirs of the deceased?

Well, SEBI (Securities and Exchange Board of India) recently clarified this question through a circular, and it also addressed another crucial matter: Can a nominee access the funds of an investor who has become incapacitated?

Let’s break it down.

Disputes over joint accounts

In the past, joint account holders often found themselves in the middle of disputes when one holder passed away. Legal heirs of the deceased would claim the deceased holder’s share of the account. However, the rules about who had the right to the assets were slightly unclear.

In 2021, SEBI stepped in and cleared the air, stating that the surviving joint holders would automatically get possession of the assets. This clarification was a big relief for many, as it ended unnecessary disputes.

Now, with SEBI’s latest circular, this rule has been reaffirmed. The surviving joint holders will continue to have full ownership of the assets, and this rule applies to mutual fund units as well.

Here’s a tricky situation

Now, you may wonder: what happens if all the joint account holders pass away at the same time?

If there’s a nominee, the assets will be transferred to them. But if there’s no nominee, the assets will go to the legal heirs of the youngest joint holder. This is based on inheritance rules and ensures that the assets are passed on appropriately.

Nominee vs. legal heir

It’s important to understand the difference between a nominee and a legal heir. A nominee is someone who temporarily holds the assets on behalf of the legal heirs, ensuring a smooth transfer of ownership. However, a nominee does not own the assets.

To simplify, the nominee’s role is to facilitate the transfer of the assets, not to claim ownership unless they are a legal heir. This is a key distinction, as many people often confuse the two.

SEBI’s rule for incapacitated investors

One of the most important changes in SEBI’s new circular concerns an “Incapacitated Person”—someone who is unable to manage their financial affairs due to health issues. In such cases, the regulator allows a nominee to step in and manage the account for the investor.

However, this is only in cases where an investor is physically restricted but can still make legal decisions. SEBI permits one nominee (except a minor) to operate the investor’s account.

Of course, the investor needs to first enable any nominee in the nomination form to assist in unfortunate situations. The best part is that the investor can decide how much the nominee can withdraw—whether it’s a fixed amount or a percentage of the account’s funds.

This move is a huge relief. Under the old rules, even if a nominee was named, their rights were inactive if the investor became incapacitated. The nominee had to go through the lengthy process of obtaining court orders to manage the investor’s wealth, which was time-consuming and complicated.

Now, with SEBI’s new guidelines, the nominee can step in and help manage the investor’s funds without the need for court intervention.

Rules unclear about this

However, what happens if an investor is incapacitated and lacks the ‘capacity to contract,’ meaning they can no longer make legal decisions? Unfortunately, this is one area the new circular doesn’t address. In such cases, the current rules may apply, which still require a guardianship certificate from the courts, a process that could be complex and time-consuming. However, also ensures that investors’ funds are not used without any safeguards. 

Bonus: Up to 10 nominees allowed

Here’s a bonus point in the new rules: SEBI has increased the number of people an investor can nominate for their account or folio. Previously, the limit was just three nominees. Now, investors can nominate up to 10 individuals for their accounts. And there is also a flexibility to edit or delete the entries whenever you want. 

In conclusion

These changes to the rules around nominations and the rights of nominees are certainly noteworthy. The intention behind these updates is reduce unclaimed assets. And that the money saved for unfortunate and emergency situations is put to the best use when it’s needed the most.