Investors are ignoring a crucial aspect of their financial preparedness. A recent Sebi consultation paper revealed that an alarming 9.8 crore (72.5%) out of 13.6 crore demat accounts in single holding are missing nomination details. This single lapse can have dire consequences for your next of kin.
Sebi had initially set a deadline of 31 March 2023 for account holders to nominate beneficiaries or formally opt out. The regulator had indicated that non-compliance would lead to account deactivation. The deadline was later extended twice, with the previous extension until 31 December 2023. Despite the warning and extension of deadline, investors have abstained. What is startling is that a whopping 69.73% or 9.51 crore account holders have deliberately chosen not to nominate anyone, that is, they have consciously opted out of nomination. Harsh Roongta, Founder, Fee Only Investment Advisers, says ignorance is only a part of the reason. “Death is far from people’s minds when they open a demat account. In recent years, in a rush to open demat accounts and get in on the market action, a lot of doit-yourself investors have simply chosen to bypass the critical step seeking nominations,” he says.
Experts warn that ignoring nominations in investments can make life cumbersome for family members after the death of the account holder. While grieving, successors will be forced to seek court orders and face other hardships to get access to assets built by the deceased for their benefit. Amol Joshi, Founder, PlanRupee Investment Services, insists, “Making nominations in your investments is necessary hygiene. If this is in place, a simple death certificate is usually enough to get assets transferred to the nominee.” Roongta avers, “The extra minute or two that it takes to register a nominee while opening an account is priceless. It ensures that your loved ones get smooth access to your assets after your death.”70% opted out of demat account nominations
Note:Figures pertain to accounts with single holding. Source: Sebi
The Sebi report further observes that among joint holdings, 31% of demat account holders and 7% of mutual fund folios have opted out of nominations. Typically, joint holders take comfort in the knowledge that even if one of the joint holders dies, the other can continue to operate the account and ensure transmission to children. However, financial planners insist that this is a gross miscalculation. This was painfully evident during the Covid-19 pandemic, when families experienced instances of both asset holders passing away in quick succession. “We actively encourage joint holders to get nominations sorted out to avoid problems in case of unfortunate incidents,” asserts Joshi.
However, he points to some practical issues that hold back account holders from doing so. “Inter-family relationship dynamics often play a role in dissuading individuals from appointing nominees,” Joshi remarks. A big roadblock is when both parents are joint holders, and the intended beneficiary is a minor. When a minor is named nominee, it becomes mandatory to appoint a guardian. This is usually someone from the extended family. If both parents pass away before the child turns 18, the guardian takes custody and control of the assets on behalf of the minor child. At times, parents have mistrust over such individuals acting in good faith when the time comes. Further, parents may have misgivings over the intention of the guardian’s next of kin if the guardian passes away. Rather than having assets misused by family members, some simply opt out of nominations, with the intention of adding nomination once the child turns major, observes Joshi.Options for demat account or mutual fund unit holders
1.Providing nomination in the specified format.
2.Opting out of nomination through prescribed declaration form.
3.If you do not nominate or opt out of nomination by 30 June 2024, your folios/demat account will be frozen.
Interestingly, mutual fund folios have shown much better adherence. The Sebi report states that only 6% of the 8.9 crore folios opted out, and another 8% neglected to nominate anyone. Among folios with joint holders, 7% have opted out of nominations. At the same time, 27% of jointly held folios have neither nominated, nor opted out.
According to Roongta, this disparity in adherence to nominations is partly owing to intervention by intermediaries in the case of mutual fund investors. “It highlights the value of a good adviser or distributor. They ensure that necessary checks and balances are in place. This guidance is missing in direct stock investments.”
It should be noted that Sebi has again extended the deadline for making nominations to 30 June 2024. Investors should use this window to fix this glaring gap. Sebi is also planning an overhaul of nomination facilities that seeks to remove roadblocks in the current processes. The consultation paper it recently floated proposes doing away with the need for additional documents like affidavits, notarisations, or such undertakings. In case of joint holdings, it suggests removing the need for submitting fresh KYC (know your customer) documents by surviving joint holders. This should encourage individuals to take nominations seriously. Continued apathy towards nominations might later lead to unnecessary stress for your close relatives. To further ensure smooth inheritance, execute a will that matches any nominations you make.
