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Nomination Or Opt-Out For Mutual Fund Unit Holders – Fund Management/ REITs

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Introduction

The nomination facility enables a unitholder to nominate (either
at the time of purchase or subsequently), a person who would be
entitled to claim the investor’s mutual fund units, or the
redemption proceeds thereof in case of an untimely death of the
unitholder. In case of joint ownership, all joint holders are
required to provide the details of their nominee together.

In case a nomination is made at the time of the initial
investment, the applicant may fill up the ‘Nomination’
section provided in the application’s account opening form,
(which may be changed any time and any number of times). An
investor can nominate any person, whether a family member, friend,
a trusted third person, a minor, or a non-resident (subject to the
exchange control rules), any government authority or even a
religious or charitable trust. In case of a minor nominee being
appointed, the guardian’s name and address must also be
provided, (in whose control the fund shall rest until the minor
attains the age of 18 years). In case a guardian invests to
purchase mutual funds on behalf of a minor, the guardian is not
permitted to also be a nominee in the same account.

Earlier it was mandatory to have at least one nominee in all
mutual fund investments.

Analysis

To safeguard the interests of investors, bring uniformity in
practices across all constituents in securities market and promote
the development and regulation of the securities market, Securities
and Exchange Board of India (SEBI) has issued a
circular on 15 June 2022 (under Section 11 (1) of the Securities
and Exchange Board of India Act, 1992, read with the provision of
Regulation 77 of SEBI (Mutual Funds) Regulations, 1996), whereby
all the mutual fund investors have been provided with an option to
invest without specifying a nominee. The new mutual fund nomination
rules apply equally for all existing and new unitholders.

Under the new rules, investors now can choose to either provide
nomination or to opt out nomination through a signed declaration
form.

  • All new investors subscribing to mutual fund units on or after
    August 1, 2022, are permitted to choose from the following options.
    They can either:

    • provide their nomination in the format as specified in fourth
      schedule of SEBI (Mutual Funds) Regulations, 1996 or

    • opt out of nomination by providing a signed declaration form
      (under
      Annexure – A)
      .


  • All the existing individual unit holder(s), holding mutual fund
    units (whether solely or as a joint holder), are required to, by 31
    March 2023, either provide their nomination or opt out of
    nomination by informing their respective asset management companies
    (AMCs). In case of any delay, the folios shall be
    frozen, and no further debits shall be permitted.

  • All the unit holder(s) shall be provided with an option to
    submit the documents either in physical or online form, as per
    their choice. To facilitate this process, all AMCs shall ensure
    that they are equipped with all adequate systems for enabling the
    e-Sign facility, while maintaining sufficient safeguards and taking
    all precautionary steps to preserve the confidentiality, safety,
    and security of all customer records.

  • In case the unitholder(s) chooses the physical option, (to
    either submit the nomination form or the declaration form for
    opting out of nomination), the AMCs shall permit them with wet
    signatures however, in case of the online option, the forms
    provided by the AMCs, shall use e-Sign facility recognized under
    the Information Technology Act, 2000.

Comments

The new investors’ adherence to the revised nomination rules
is required from 1 August 2022 onwards, while existing mutual fund
investors will have to comply with the rules by 31 March 2023. In
view of the above, all existing mutual fund investors who have not
yet nominated anyone, can expect the AMCs to reach out to them to
either fill the nomination or the opt-out nomination form. In case
of any failure, they will not be able to withdraw their funds from
next fiscal year, starting 1 April 2023.

The circular facilitates investor’s choice by providing an
option to either nominate or opt-out of nomination, thereby
permitting a unitholder to decide as per the preferred
selection.

On the other hand, since the nomination facility enables a
smooth transfer of funds to the nominee(s) upon the death of the
investor, in the absence of a nominee, (multiple legal documents
like the will, legal heir certificate (as per succession law), a
no-objection certificate from other legal heirs, etc.), will have
to be produced by the claimant to get the units transferred, which
is a long drawn and strenuous legal procedure, and these are some
of the considerations that the investors would need to account for,
while exercising their nomination preference.

The content of this document do not necessarily reflect the
views/position of Khaitan & Co but remain solely those of the
author(s). For any further queries or follow up please contact
Khaitan & Co at legalalerts@khaitanco.com

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