The rite of succession in India
Harsh Roongta Harsh Roongta | 10 Nov, 2023
(Illustration: Saurabh Singh)
It was the horrible summer of 2020 when Covid was ravaging the entire world. Sunil, 65, was a retired professional. His spouse Rashmi, 64, a homemaker, resided with him in Mumbai. Their two children (Anil, 40, and Monali, 37) were both settled overseas. They were living an ideal life until Covid struck. First, Rashmi succumbed to the virus in May 2020 and a month later, the virus took Sunil’s life as well. Their children were unable to even come to India for cremation. With great difficulty, Anil reached India a few months later to pick up the pieces. Like most Indian families, the children were completely unaware of their parents’ financial affairs. When Anil looked at the cupboards and other storage devices at home, he came across a detailed inventory of their assets. He also found a pouch containing papers relating to his parents’ residence as well as units held in seven mutual funds and shares held in a demat account (all in Sunil’s single name, with Rashmi as the nominee) and one bank account each in Sunil and Rashmi’s name, with each other as the nominee. He also found the key to a bank safe deposit locker with details of the bank in which the locker was situated. The locker was in Rashmi’s name and Sunil was the nominee. He could not find any will for either of his parents.
Anil checked with the concerned banks, mutual funds, and the depository participant in which Sunil had a demat account. All of them mentioned that they would need a letter of administration issued by a court before the assets could be transferred in their (Anil and Monali) names. Their housing society mentioned the same thing. Anil could not even access the bank locker without having the same court document.
There was no dispute between Anil and Monali, but they still had to go through a lengthy court process that took more than a year and cost them a couple of lakhs. Their ordeal did not end with getting the court document. Anil had to make three more trips to India and individually go to each of the banks, mutual fund houses and the depository participants separately and submit extensive documents before the assets could be transferred in their names. That took another 18 months, or so.
All this when Sunil had been very careful to list all his assets and had made sure that Rashmi was the nominee. Unfortunately, Covid had laid low all his plans as he did not get the time to change the nominee after his spouse’s death.
Such issues with India’s inheritance and succession systems have always existed. Covid just brought these issues to the fore, even as each of us confronted our own heightened sense of mortality.
Readers might be surprised to know that the different parts of India’s financial systems have completely different rules. Just as a sample, the Indian Provident Fund 1925 (which governs the provident fund for government servants) allows what is known as “successive nominations”. So, if Sunil had been a government servant with a GPF account, he would have had a facility to nominate Rashmi as the first nominee and he could have pre-nominated Anil and Monali as equal nominees in case Rashmi pre-deceased him (which she did). Unfortunately, this “successive nomination” facility is not available in respect of any other asset.
These and many other issues have been succinctly brought out in a white paper (bit.ly/3ZzCNI8) written by Pramod Rao, who wrote this paper in his personal capacity. He currently serves as executive director at Securities Exchange Board of India (SEBI). The Association of Registered Investment Advisers (ARIA) provided inputs for this paper. ARIA is a Section 8 not-for-profit company formed to promote investor interests by elevating the standards of the investment advisory profession. Veteran business leader KV Kamath has written a foreword for this white paper.
Issues with India’s inheritance and succession systems have always existed. Covid just brought these issues to the fore, even as each of us confronted our own heightened sense of mortality
Apart from the suggestion of making “successive nomination facility” available across the board, the white paper has made many recommendations to ease the tedious, lengthy, and expensive inheritance process. Some of these suggestions are highlighted below:
– There should be an easy, online, uniform, and simple process to check the status of nominations and to make or change nominations. This already exists in the banking and securities markets and needs to be extended to other sectors (insurance, EPFO, small savings, NPS, etc).
– The banking regulations allow only one nominee and need to be amended to allow multiple nominees for one bank account/locker. Every sector has a different number of nominees allowed for each account (three nominees allowed for mutual funds and demat accounts) and the necessary changes should be made to allow as many nominees as may be desired by the account holder. Also, the account holder should be allowed to specify percentage allocation among nominees.
– Account holders should be required to provide a nomination or a declaration that they do not wish to nominate.
– If a couple are joint holders, they may not name their minor children as nominees simply because they may not be able to name a guardian. Hence, there should be no compulsion to name the guardian in such cases.
– Account holders should optionally be allowed to do the KYC formalities for the nominees at any time, even during their lifetime. This ensures that there are no delays in the settlement of the account on the demise of the account holder for doing KYC formalities of the nominee. This is particularly important where the nominees are non-residents and can conveniently complete the KYC formalities when they visit India during the lifetime of the account holder.
– In a global first landmark and well-detailed circular (bit.ly/3skPSZX), SEBI has made the life of surviving family members much easier to claim their rightful inheritance through a centralised death reporting mechanism. The deceased’s death certificate and PAN will have to be submitted to only one of the financial entities. This entity will verify the death certificate within one working day and notify any one of the six KYC Registration Agencies (KRAs) about the verification. The KRA, in turn, will perform independent verification using details available in its system within one working day. The deceased’s KYC will be marked as verified and the KRA will notify all the other entities in the capital market about the updated status. Within five days of receiving this message, all the entities will need to reach out to the nominee(s), informing them about the transmission procedure and the documents to be submitted. All this will happen within a week of submission of the death certificate. This will aid in the discovery of unknown assets—even if the nominee was aware of only one of the investments, he will get to know about the investments with all entities in the capital markets. This rapid permeation of information within the system will also prevent fraud. Similar centralised reporting is needed for all other areas such as banking, insurance, small savings, etc. Eventually, the centralised reporting mechanism should work across all sectors.
– It is one of the peculiarities of the inheritance systems in India that, except for life insurance, nominees are treated as trustees for the legal heir. Let’s understand this with an example. Suppose the deceased person has not made a will and has his spouse and two children as the only legal heirs. Let’s further assume that he had a life insurance policy and mutual fund units in his name and in both, he had named his spouse as the nominee. When he dies, the wife will be able to get the proceeds of the life insurance policy and get the mutual fund units because of her status as the nominee. She is not accountable to her two children for the life insurance policy amount, but both her children are entitled to get a one-third share of the mutual fund units from her. The most important suggestion made in the white paper is to elevate the status of the nominee to a beneficial owner, just like it has been done in the Life Insurance Act.
Many exciting new developments, such as the account aggregator system, will enable easy and central discovery of the deceased person’s assets and will start contributing soon to make the inheritance process simpler
Many exciting new developments, such as the account aggregator system, will enable easy and central discovery of the deceased person’s assets and will start contributing soon to make the inheritance process simpler.
Most of the suggestions made in the white paper already exist in some parts of the Indian system or the other. What is needed is to harmonise all these provisions and apply them uniformly across the entire inheritance system in India, including immovable assets. Surely, anything that contributes to making life easier for the family members to inherit the assets left behind by their loved ones will count towards increasing the ‘Ease of Living Index’ in India.
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