NISM Series VI Study Notes: Chapter 5 – Functions of Depository Participant: Transmission and Nomination

This study guide provides comprehensive, exam-focused short notes on Chapter V: Functions of Depository Participant (Transmission and Nomination) under the NISM Series VI Depository Operations Certification. It is structured to help students and professionals master critical regulatory rules, legal frameworks, and step-by-step processes required for depository operations in India.

1. Understanding Transmission of Securities

What is Transmission?

Transmission of securities refers to the devolution of title to shares or other securities by operation of law. Unlike a normal transfer, which is a voluntary act of parties, transmission is an involuntary transfer that takes place due to specific legal events such as:

• Death of the account holder.
• Lunacy (mental unsoundness).
• Bankruptcy or insolvency.
• Winding-up of a corporate entity.

The person on whom the securities devolve must prove their legal entitlement by submitting the appropriate prescribed documents to effect the transmission.

Physical vs. Depository Mode of Transmission

The depository system significantly simplifies the transmission process compared to the physical certificate system:

The Rule on Encumbered Securities

If the securities in the deceased Beneficial Owner's (BO) account are encumbered (e.g., pledged or earmarked as collateral):

• They cannot be transferred out of the account.
• They must remain in the deceased BO's account.
• They will only be released for transmission once the encumbrance is removed or the underlying financial obligation is fully met.

2. Nomination for Securities

Regulatory Framework

The Companies (Amendment) Act, 1999 introduced formal provisions for nomination in respect of financial assets such as shares, debentures, bonds, and fixed deposits. Under these provisions:

• An investor can nominate a person(s) in whom the securities will vest in the event of the original investor's death.
• Nomination limits: An investor can nominate a maximum of 3 nominees.
• Eligibility: The nomination facility can be availed of by any individual, whether a resident Indian or a non-resident Indian (NRI).

Nomination in the Depository System

For securities held electronically in dematerialised form, the rules are highly streamlined:

• Availability: Investors can register a nomination at the time of opening the depository account or at any subsequent date.
• Documentation: There is a separate, specific prescribed form for registering, changing, or cancelling a nomination under the depository segment.
• Flexibility: The beneficial owner can change the nomination at will by resubmitting the nomination details in the prescribed form.
• Operational Change: Any change in nomination details must be communicated in writing to the DP.

3. Operational Scenarios & Legal Procedures for Transmission

To ensure a high level of accuracy and compliance, a Depository Participant must execute different procedures depending on the ownership structure of the demat account and whether a nomination was registered.

Scenario A: Transmission of Singly Held Securities (Without Nomination)

When an individual account holder dies without registering a nominee:

1. The legal heir(s) or legal representative(s) of the deceased must initiate the transmission process.
2. They must submit a formal request in the prescribed transmission form to the DP.
3. The request asks the DP to transfer the electronic securities balances lying in the deceased's account into the account of the legal heir(s).

Scenario B: Transmission of Jointly Held Securities

When a depository account is opened in joint names:

1. Survivorship Principle: In the event of the death of one of the joint holders, the securities balances do not automatically go to the heirs of the deceased; instead, they devolve upon the surviving joint holder(s).
2. Action Required: The surviving client(s) must request the DP to transmit the balances lying in the joint account to their account.
3. Account Closure Rule:
   • Joint accounts are unique; the surviving holders must open a new account in their names (excluding the deceased).
   • The DP transmits the balances to this newly opened account.
   • The original joint account containing the deceased holder's name is closed immediately after the transmission is completed.
4. Mandatory Documentation: The surviving holders must submit:
   • An application in the specified depository form.
   • The original death certificate of the deceased holder, OR a copy of the death certificate that is duly notarised or attested by a gazetted officer.

Scenario C: Transmission of Securities Held by a Karta of a Hindu Undivided Family (HUF)

Upon the demise of the Karta of a Hindu Undivided Family (HUF), the HUF entity does not dissolve. The following procedures apply:

• Appointment of New Karta: The surviving member(s) of the HUF may appoint the eldest surviving member of the HUF as the new Karta.
• Name Change Procedure: To replace the deceased Karta's name with the new Karta's name in the HUF's demat account:
  1. The surviving members, through the newly appointed Karta, must make a joint application to the DP.
  2. This application must be in the format specified by the depository.
• HUF Partition Rule: If the HUF undergoes a partition:
  • The securities held in the HUF account must be divided among all the members in the specified manner.
  • The surviving members must furnish the DP with the beneficial owner (BO) account details of the individual members so that the securities can be distributed to their respective individual accounts.

Scenario D: Transmission-cum-Dematerialisation of Securities

This is a special operational facility designed for joint holdings of physical certificates where a co-holder has deceased:

• The Problem: If an investor holds physical certificates in joint names and one or more joint holders die, the physical certificates must be updated before dematerialisation can happen.
• The Solution: The surviving joint holder(s) can simultaneously remove the deceased's name from the physical certificates and convert them into demat form.
• Procedure:
  1. The survivors must submit the physical security certificates to the DP.
  2. They must submit the Transmission Form along with the Demat Request Form (DRF).
  3. The DP must verify that the target demat account is opened in the name of the surviving holders only.

4. Key Takeaways & Exam-Focused Points

• Maximum Nominees: You can nominate up to 3 individuals for a single demat account.
• Nomination Eligibility: Both resident Indians and NRIs can nominate or be nominated.
• Nomination Changes: Nomination is not permanent; it can be changed or modified at will by submitting the prescribed form in writing to the DP.
• Joint Account Transmission: You cannot simply remove a deceased person's name and keep the joint account active. A new account must be opened by the surviving holders, and the old account must be closed.
• Encumbered Securities Status: Pledged or earmarked securities cannot undergo transmission until the pledge is officially invoked or closed.

5. Important Terms Glossary

• Transmission: Devolution of title to shares or securities by operation of law (due to death, lunacy, bankruptcy, etc.).
• Nomination: A legal facility allowing an investor to designate up to three individuals who will inherit/vest the securities upon the investor's death.
• Karta: The manager/head of a Hindu Undivided Family (HUF) who manages its assets and depository accounts.
• Encumbrance: A legal claim or liability on securities (such as a pledge or earmarking) that restricts their transfer.
• Survivorship: The legal right of surviving joint holders to automatically receive the deceased joint holder's share in the joint account balances.

6. Practical Real-World Examples

Example 1: Joint Demat Account Holder Transmission

• Scenario: Rajesh and Ramesh hold a joint demat account. Ramesh passes away.
• Process: Rajesh cannot continue using the old joint account. He must submit a transmission form along with Ramesh's notarised death certificate. Rajesh must open a new single demat account in his own name. The DP will then electronically transmit the entire balance from the joint account to Rajesh's new account and close the old joint account.

Example 2: Transmission-cum-Dematerialisation

• Scenario: Sunita and her mother, Kavita, hold physical share certificates of ABC Ltd. Kavita passes away. Sunita wants to dematerialise the shares.
• Process: Instead of sending physical shares to ABC Ltd. to delete her mother's name first, Sunita can approach her DP. She submits the physical certificates, a Transmission Form, and a Demat Request Form (DRF). The DP ensures Sunita has a demat account in her sole name and executes the transmission-cum-demat process in one seamless step.