SEBI issues consultation paper on revised nomination norms for demat accounts, mutual funds

India's capital market regulator, Securities and Exchange Board of India (SEBI), on 17 March, issued a consultation paper on modified norms for the nomination in demat accounts and mutual fund folios, seeking comments from the public.

SEBI said the consultation paper seeks public suggestions to "modify the circular on ‘Revise and revamp Nomination Facilities in the Indian Securities Market’, issued on January 10, 2025, to enhance the ease of investor onboarding and ease the nomination process by aligning with the banking norms on nomination."

SEBI's revamped nomination norms

Last year in January, the market regulator issued a detailed circular, outlining the revised nomination facilities, allowing single-holding investors to authorise one nominee (excluding minors) to operate their accounts if they are physically incapacitated but still mentally capable of contracting.

However, nominees are not allowed to update key details such as bank accounts or contact information.

Besides, under the revamped norms, investors are mandatorily required to provide any one of the personal identifiers of the nominee, such as PAN or driving licence number or the last 4 digits of Aadhaar, along with full contact details of the nominee, the relationship of the nominee with the investor, and the date of birth of the nominee if a minor.

Moreover, investors were allowed to nominate up to 10 persons in the account of a mutual fund folio. Power of Attorney (POA) holders of the investor were not allowed to nominate.

SEBI proposals

1. SEBI's revamped nomination rules say regulated entities will provide a facility to the investors to empower the nominee to operate their account or folio in case of incapacitation of the former, but still has the capacity to contract.

However, SEBI underscored that the industry finds the implementation of this facility challenging due to high implementation costs and the difficulty in maintaining audit trails.

Furthermore, this facility poses significant risks of fraud, misuse of accounts, and future legal disputes.

SEBI has proposed that the existing mechanism of Power of Attorney may also be used in situations where the investor is incapacitated, but still has the capacity to contract.

2. The process of furnishing various details of the nominee is onerous for investors, and as a result, many investors are dropping off onboarding.

SEBI proposed that only the name and nature of the relationship will be mandatory details sought, and all remaining details shall be optional for the investor to provide.

3. In order to simplify the process of onboarding, SEBI proposes that the default choice for the investor will be to opt in for nomination at the time of opening a new account.

For existing accounts where no nomination or opt-out is provided, the regulated entities will regularly send messages to such investors by email and SMS, encouraging them to provide a nomination.

4. The January 10, 2025, circular increased the maximum number of nominees from 3 to 10. However, increasing the nominees to 10 may create a strain on the system, leading to operational issues. SEBI proposes that the maximum number of nominees may be increased to 4 for demat accounts and mutual fund folios. However, the maximum number of joint holders in the demat account/ mutual fund folios will continue to remain 3.