How To Make Nomination and Succession Frictionless

One outcome of the devastating, once-in-a lifetime pandemic is a grim realisation about our lack of preparedness for unexpected tragedies. Those who have lost loved ones over the past 20 months had to run the harrowing gauntlet of succession issues, while trying to come to terms with their loss. The problem is not limited to the pandemic and its enormity is clear from these numbers.

A collation by Recoversy.in puts the value of unclaimed financial assets at a stupendous Rs1.4 lakh crore as on 30 March 2020. This was before the pandemic really unleashed its devastation and the new numbers would be significantly higher.

The sheer number of deaths, often within a family, ought to create a sense of urgency to put in place a holistic, humane and speedy system to deal with transmission and succession issues. Remember, a Will allows a person to decide how to distribute her assets, but the process of fulfilling those wishes is harrowing and urgently needs disruptive reform.

In the hierarchy of vital changes that are needed, fixing our slow, expensive and broken legal system would be at the top of the list, but it is also the most challenging and least likely to happen. A white paper titled 'Making Succession Smoother and Simpler' by Pramod Rao for the Association of Registered Investment Advisers (ARIA) notes that it takes 8-10 months (and a fat fee) to obtain a probate in uncontested Wills and around 6-9 years if it is contested—often longer. Succession certificates have a similar time frame. The pandemic has only extended these timelines. Imagine the plight of people who lost multiple family members to COVID-19 after having already depleted their resources on hospitalisation costs.

At a time when savings and investment records are all digitally stored, it is possible to move past incremental improvements and work at a holistic, technology-based solution that will bring about transformational change. The key is for our financial and realty regulators to work together to make this happen. We need to build public pressure to make it happen and move past small modifications.

For instance, on 18th October, the Securities & Exchange Board of India (SEBI) asked (SEBI Asks RTAs To Transmit Securities in Favour of Surviving Joint-holder) registrars to issues and share transfer agents to transmit securities in favour of surviving joint-holder/s on the death of one or more joint-holder/s. This clarification followed a complaint to the regulator.

A few days before this, a Whatsapp forward had resurfaced claiming that a survivor with a joint fixed deposit in a bank cannot break it prematurely and access funds without concurrence from all legal heirs. Astonishingly, this message remains in circulation in October 2021, although the Reserve Bank of India (RBI) has clarified the issue in August 2012. On the death of a joint-holder, banks have been told to permit premature withdrawal without penalty – subject to the existence of a joint mandate obtained from both account-holders while opening the account. But RBI found that banks have neither included this clause in account opening forms nor followed RBI directives to spread awareness about it. A previous circular dated 9 June 2005 was entirely devoted to simplify the nomination and transmission process, which has been updated to insert this clarification.

The core of the circular says that banks need to take necessary precautions while transferring account proceeds to nominees, but cannot make 'superfluous and unwarranted' demands such as seeking bonds, indemnities and sureties from the nominees, or it would 'invite serious supervisory disapproval'. Even where there is no nomination, RBI is clear that banks should keep in view "the imperative need to avoid inconvenience and undue hardship to the common person." This continues to be ignored.

The 2005 circular says that the Indian Banks' Association was to formulate a 'Model Operating Procedure' to settle claims of deceased account-holders in various circumstances; but banks continue to follow arbitrary processes and demand indemnities and sureties.

The continued harassment of nominees is solely due to RBI's half-hearted instructions allowing banks to use their discretion rather than issuing standard operating procedures (SOP) for dealing with nominations and transmission.

As the ARIA paper says, the need of the hour is a holistic system that works across all assets, puts in place standard rules and protocols for transmission of financial assets and covers the needs of minor children and incapacitated seniors. The question is: Who will bell the cat? Leading banker KV Kamath, in a foreword to the ARIA report, says: "All that this needs is a short and coordinated effort of say six months, from all the parties involved, and if required, facilitated by the Regulators who could consider modifying the regulations to enable the institutions to use these new approaches." In a few cases, the government might need to modify the governing laws to make this happen, he adds.

Some simple steps suggested by ARIA are:

• Nominees: Equate or elevate nominees to legal and beneficial owners of assets (as opposed to holding them in trust for the heirs) in order to avoid legal processes.
• Centralised Link: Link nominations to the Customer ID and provide for a mandatory default nomination. I am not in favour of eliminating a person's right to make an informed decision with regard to a nominee; so the nomination ought to be a default option without making it mandatory.
• Common Form: Have a simple, common form for nominations across the financial services sector.
• E-nomination: Develop an e-nomination facility that allows online changes and authentication via OTP or digital signatures.
• Specific, Successive and Proportional Nomination: Create a simple system that allows specific nominations for various assets, including successive and proportional nomination.
• Additional Information: An important suggestion, in the online facility, is to capture additional information about nominees such as contact and identity details. The paper-based systems today do not capture such information.
• Central Database: The ARIA paper suggests a common blockchain-based ledger across banks to maintain a credible history of nomination changes. This would be an important record in case of disputes and can easily be implemented by agencies such as Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Centralised reporting of the demise or incapacitation of a financial consumer could trigger proactive outreach by financial service-providers to the nominees.
• Incapacitated Persons: ARIA seeks a change in rules to enable nominees to access and transact in financial assets of incapacitated persons, after certification by an independent medical practitioner which can be submitted to the financial service-provider. This is a difficult but important requirement, whose need was acutely felt when entire families, and especially the bread–earners, were affected by COVID and could not access their funds. It is also required to care for senior citizens suffering from irreversible brain disorders such as dementia. In case of people with savings, there is an urgent need to formulate a policy to allow care-givers to access these funds for their care and treatment, with adequate checks to ensure proper utilisation. There are plenty of reports where wives or daughters of savers have had to approach the high court for permission to access the accounts of their incapacitated spouse and mother, respectively. At present, RBI rules allow a person who cannot sign to withdraw money using a thumbprint or even a toe impression on the cheque/withdrawal form, so long as it is identified by two independent witnesses known to the bank, one of whom must be a bank official. This does not help in degenerative mental disorders which require a permanent solution while the person is still alive and needs his or her money.
• Minors or Orphans:  A similar situation would arise in the case of minor children orphaned in the pandemic or other calamities, where the savings of deceased parents have to be used, accessed and protected on their behalf until they are independent or capable of managing on their own. The need for a clear policy and processes with adequate safeguards (to prevent misuse and loot) will become more acute as families continue to shrink.
• Notarising: ARIA also suggests notarised nominations for proof of validity and would like on officer at each major branch to be recognised as a Notary. While the idea of strengthening nominations is good, this adds needless friction to the process as even large tech-savvy private banks may be unwilling to implement it.In a recent case before Moneylife Foundation, a large bank insisted on a branch visit with identification documents to close a demat account. Despite a 30-minute process that included form-filling, verification and a personal sign-off by the manager, the demat closure was rejected since a signature mis-match was flagged by the bank's automated process. The customer was forced to visit to the bank again for resubmission. It transpires that the bank does not trust its 6,000-odd branch managers to have a final say on signature verification for fear of fraud. But signing is a physical act and signatures change with age and physical condition—machines cannot decide and unleash harassment either. Moreover, for many decades, public sector branch managers have been entrusted with signature verification during a personal visit to the bank. So accepting bankers as notaries may not be an easy proposition.

A high-powered group at the finance ministry or NITI Aayog with a time-bound mandate to set the rules and processes and ensure that these are implemented by all regulators is the ideal way forward. But we will need to build public pressure to get the policy-makers to perceive and recognise the problem.

We request readers who have had a tough time getting their money as nominees to write to foundation@moneylife.in with details. We intend to take this issue forward and actual experiences and case studies would be of great help. You can request that your name is not to be revealed, if you so desire. — Sucheta Dalal