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EXPLAINER: Why Sebi junked its nomination rule?

June 25, 2024


In 2021, the Securities and Exchange Board of India (Sebi) had directed all individual demat and mutual fund folio holders to submit a ‘choice of nomination’ or explicitly opt-out by June 30, 2022. The markets regulator has said demat accounts and mutual fund folios will not be frozen if nomination details are absent. Earlier, it had directed individual investors to nominate a beneficiary or submit an opt-out declaration by June 30, 2024.

The original nomination rule

IN 2021, THE Securities and Exchange Board of India (Sebi) had directed all individual demat and mutual fund folio holders to submit a ‘choice of nomination’ or explicitly opt-out by June 30, 2022. Failure to comply with the regulation would have resulted in investors’ accounts being frozen, and any debit transactions would not be possible. The aim was to safeguard investor interests and streamline the transfer of assets in case of the account holder’s demise. However, due to significant pushback from industry stakeholders, the deadline was extended twice, with the latest extension to June 30, 2024. As a result, no accounts have been frozen specifically for non-submission of nominee details so far. Based on feedback from market participants and to ease compliance and investor convenience, it has now decided to relax the nomination norms.  This faced several challenges, including accessibility, administrative complexity, technology upgrades, and personal preference. Older investors or those uncomfortable with digital platforms, struggled to comply. Smaller brokers and mutual fund houses faced difficulties in upgrading their systems to handle the new requirements. Again, some investors did not have or preferred not to appoint a nominee due to personal reasons, such as privacy concerns or unresolved family issues.

What is Sebi now saying

The market regulator has now said that non-submission of nomination details will no longer result in account freezing. Investors with physical securities can now receive payments and services without submitting a nomination. Withheld payments, including dividends, interest, or redemption payments due to lack of nomination, will now be processed. However, all new investors must continue to provide the ‘Choice of Nomination’ (except for jointly held demat accounts and mutual fund folios). Sebi has simplified the nomination format, requiring only the nominee’s name, share, and relationship with the applicant. Additionally, it has urged depository participants to encourage updates on nomination choices through fortnightly emails and SMS. From October 1, a pop-up reminder will appear when logging into demat or mutual fund accounts.

What made Sebi scrap the old rule

The feedback and operational difficulties highlighted by market participants and continuous representations from industry stakeholders prompted Sebi to reconsider the rule entirely. The administrative burden and compliance costs were disproportionately high, especially for smaller entities. Eliminating the rule reduces the risk of operational bottlenecks and ensures robust and efficient market infrastructure. Sebi recognized that the rule, in its existing form, posed significant challenges to the ease of doing business in the securities market.

Implications of this decision

Scrapping the order to freeze accounts for non-submission of nomination details addresses the concerns of investors and market participants, enhancing overall confidence in the regulatory environment. This move reflects Sebi’s willingness to adapt its regulatory framework based on practical considerations and stakeholder input. Brokers and mutual fund houses can now focus their resources on other critical areas without the added burden of enforcing the nomination mandate, potentially leading to more efficient operations and better service delivery. However, Sebi might still explore alternative measures to achieve the same investor protection goals, possibly through more inclusive and non-burdening compliances or phased implementation.

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