Nominee Shareholder

Nominee shareholder refers to individuals who hold shares on behalf of another person or beneficial owner or original holder of shares. This provision helps actual owners when they choose not to disclose themselves as the owner of the shares of a company. In short, having a nominee lets them hide their identity as a shareholder.

The nomination is a mandate given by a shareholder to give the legal title of shares to a described person with whom shares shall vest on the death of a shareholder or original holder. This described person becomes the nominee for the beneficial owner.

The nominee shareholder meaning indicates the one who is in agreement with the actual shareholder to hold the latter’s share. This shareholder nomination allows the beneficial owner to have someone to look after the shares they own in their absence. The nominee shareholder provision serves various purposes but the most important of all is that it lets the actual owners of the shares to keep their identity hidden, if they choose to. In addition, it also enables them to have a nominee to take care of the shares after them.

A nomination is a direction for shares disposed of to a prescribed person in the event of the death of the original shareholder. The company allows the transfer of shares easily unless any special condition is kept under the legal, constitutional document of the company—I.e., articles of association about Indian companies. If shares are held in joint capacity, both holders have to give nominations under their name of holding.

Nomination can be filed anytime during the lifetime in writing with the company in the prescribed form. It can be even canceled or amended later by filing a prescribed form. The effect of any mandate given by the shareholder shall be valid from the date when the company receives it. Nominee shareholder does not have any benefit as the beneficial shareholder is having till the original beneficial shareholder is alive. Nominees enjoy the same rights and liabilities as the original shareholder once shares.

The holder of the share does register nominee shareholders on behalf of the original shareholder to register them under whose hands securities shall vest upon the death of the original shareholder. Shares include securities in its definition.

They do not own any benefit or legal claim over shares until the beneficial or original shareholder is alive. Every company maintains a list of the shareholders who are beneficial owners of the company’s shares. This list also includes details of the nominee.

A nominee shareholder offers multiple nominee shareholder services on behalf of the beneficiary owner. They are contractually bound to take care of the shares when the real shareholders are unable to do so. Hence, they act as the share owners themselves. Let us check out the functions of these shareholders quickly:

• As per UK law, any company or individual can become a nominee shareholder who acts as trustee to the shares in order not to disclose the identity of the actual shareholder.
• In case of the death of beneficial shareholders, such a person ensures the filing and validity of the nomination. Details of the nominee have to be updated by the company from time to time based on details provided by beneficial owners. Such details are authenticated by the company secretary or another person nominated by the company’s board.
• On the death of the original beneficial shareholder, the nominee can either hold a share in his name or transfer a share in any person’s name as an original shareholder could have done.
• If a nominee shareholder intends to transfer a share in his name, they must produce proof of death of the original beneficial shareholder along with prescribed forms and documents that will not attract stamp duty as it is the case of transmission.

A nominee must file a declaration of trust that they have no benefit over shares until the original shareholder is alive. This declaration is called a custodial agreement. Under the custodial agreement, the nominee shareholder holds the shares. Any person or body corporate can hold legal title to shares under nomination. Even a minor can be a nominee to shares in a company. If the nominee is minor, then shareholders shall appoint any other person to become entitled to shares in case of the death of shareholders during the minority of the nominee.

On the death of a shareholder, shares are transferred to nominee shareholders. He will have all rights as original shareholders. They are a trustee for the legal heirs of a deceased shareholder. They cannot have ownership of shares until it is written into the will of deceased shareholders. Nomination to shares alone cannot consider a nominee as the owner of the share until prescribed in the shareholder's will. A nomination is just to have hassle-free transmission if shares post the death of a shareholder.

Benefits that accrue to the nominee on the death of beneficial owners will be taxable in the hands of the nominee as beneficial interest, which is attached to the shares on which the nomination is registered. A nominee is liable for complying with payment of tax and for other liabilities, which he gets as attached to the shares. Hence, the nominee is liable for payment of tax for the benefit he received or for transferring the benefit to others on shares he received on the death of an original beneficial holder of shares.

Let us consider the following examples to understand the concept better:

Example 1

Stalin pays for the shares of company A as he observes the performance and share prices going up continuously. Hence, he decides to buy them, but without registering those shares in his name. he connects with Stella, his friend’s friend, and asks her to be his nominee.

Stella agrees and both of them come to an agreement and activate the deal. Per the contract, Stella becomes the known owner, while Stalin’s name remains confidential, though the rights and benefits are all his in the process and Stella serves her obligation for a fee.

Example 2

Singapore, in 2022, came up with an announcement that made it mandatory for Singaporean and overseas companies registered in Singapore to have a register maintained where the names of the nominee shareholders and their nominators would be mentioned. The regulation came following the Corporate Registers (Miscellaneous Amendments) Act, which aimed to ensure combatting money laundering instances and other threats to the financial sector.

Having nominee shareholders on board is of great help in many situations where the actual shareholders are not present. They become the decision-makers in the actual owner’s absence. The other advantages of the process include:

• The nomination is a useful procedure that enables the company to identify a legal representative of the original shareholder in the case of the deceased shareholder, which also avoids disputes of legal heirs to claim legal title to share in the case of the deceased shareholder.
• It involves a quick and easy process for a company to identify with whom to contact and deal with the demise of a shareholder.
• The nominated shareholder is also chosen by the actual shareholder in the case where the latter wants to keep their identity confidential.

There has been controversy in legal heirs vis ownership of rights of the nominee for transferred shares. Currently, companies act does not allow to create third succession mode, i.e., a valid testamentary cannot override a valid nomination created under the Act. The nominee is held to be just a trustee for the legal heirs. A fiduciary relationship is established between the nominee and legal heirs to protect the interest of legal heirs until the will of the original shareholder is given effect. Hence it can be said that a single nomination cannot establish ownership of shares; it is just a device for companies to enable smooth transmission of shares.

Therefore, besides the advantages, there are disadvantages as well that pose threat to having a nominee shareholder on board. Let us have a look at some of the risks associated with having them as an arrangement:

• Having nominee shareholders involves time and cost to register and maintain details. For the company and the government, it is often difficult to identify the beneficial owner of the shares to be held personally liable for benefits attached to the shares.
• Nominee shareholders can take legal ownership of shares merely by their name given under nomination by the deceased shareholder in the scenario of the negligence of a person entitled to shares under the will of a deceased shareholder.

A beneficial owner of shares appoints a nominee to hold shares on their behalf to serve their purposes. The purpose can be anything from having someone to look after their shares after them, i.e., in the event of their death or absence due to any reason, to representing their shares as someone else’s as they aim to maintain confidentiality.

Besides the purpose involved, there are distinctions that one must know of to understand they are two entities with different levels of accountability:

• A nominee shareholder is appointed, but the ultimate power is in the hands of the real owner.
• In this arrangement, all the rights and benefits remain with the beneficial owner and the nominee only remains the owner for namesake with no rights and benefits meant for them.
• A nominee carries out its functions toward the shares in exchange for a fee or commission, while a beneficial owner only loses money paying someone else for taking care of their shares.

This article has been a guide to what is Nominee Shareholder. We explain its agreement details, risks, tax implications, vs beneficial owner, benefits & examples. You can learn more about financing from the following articles –

• Shareholder Resolution
• Shareholder Letter
• Shareholders Meeting
• Shareholder Structure 
• Total Shareholder Return