Layman vs Legal Understanding of Nominee Shareholder under the Companies Act, 2013
❌ Myth (Layman’s Understanding): Nominee Shareholder under the Companies Act
A nominee shareholder is often misunderstood as someone you just “nominate” to hold your shares after you pass away. People assume that nominating someone is the same as giving them ownership or shareholding rights.
But this is not legally correct when you’re alive.
Table of Contents
✅ Legal Definitions – Two Completely Different Concepts Nominee Shareholder under the Companies Act
Nominee Shareholder under the Companies Act, 2013, nominee shareholder can be interpreted in two different contexts, and each has its own meaning, purpose, and legal procedure.
1️⃣ Nomination Under Section 72 – Death of Shareholder
- This is where a shareholder nominates a person to inherit the shares upon death.
- The nominee only comes into the picture after the death of the original shareholder.
- No rights or ownership are given during the lifetime of the shareholder.
- This is done by filing Form SH-13 with the company.
🔹 Example:
Mr. Rajesh holds 1,000 shares of XYZ Pvt Ltd. He nominates his wife Mrs. Rina using Form SH-13. If Mr. Rajesh dies, the shares will be transmitted to Mrs. Rina without any probate or court process.
📌 Key Point: Until Mr. Rajesh is alive, Mrs. Rina has no ownership, no voting rights, and no say in the company.
2️⃣ Nominee Shareholder Under Section 89 – Holding on Behalf of Another
This is where one person (nominee shareholder) holds shares on behalf of the actual or beneficial owner, often for privacy, regulatory, or structuring reasons.
- The nominee is the registered owner but has no beneficial interest.
- The beneficial owner is the true owner who enjoys profits and makes decisions.
- Requires mandatory filing of MGT-4, MGT-5, and MGT-6.
🔹 Example:
Mr. John, a foreign national, invests in an Indian company ABC Pvt Ltd. Due to FDI structuring reasons, he appoints Mr. Arjun (an Indian citizen) as the registered shareholder (nominee shareholder). Mr. Arjun’s name appears in ROC records, but the beneficial ownership lies with Mr. John, who files MGT-5. Arjun files MGT-4, and ABC files MGT-6 with ROC.
📌 Key Point: Even though Arjun’s name is on paper, he cannot act without John’s instructions.
🔄Nominee Shareholder under the Companies Act Key Differences
| Aspect | Nominee Under Section 72 | Nominee Shareholder Under Section 89 |
|---|---|---|
| Comes into effect | After death of shareholder | During lifetime |
| Legal Ownership | Beneficial and legal until death | Legal only (name on paper) |
| Purpose | Succession planning | Ownership structuring, privacy |
| Rights | Gets full rights after death | No real rights; acts as per beneficial owner |
| Forms involved | SH-13, SH-14 | MGT-4, MGT-5, MGT-6 |
📌 Common Mistake People Make
They assume that nominating someone using SH-13 gives that person ownership during their lifetime—but that’s false. Nomination is not equivalent to gift, transfer, or trust.
🧠 How to Avoid Confusion?
- Use the term “beneficial owner” when referring to the real investor.
- Refer to “registered owner” as the name on paper.
- Clearly separate succession-based nomination from legal structuring nomination.
- Always maintain proper documentation and ROC filings.
Scenario 1 – Nominee under Section 72 (Succession Nominee)
Situation:
Mr. Ramesh, a shareholder in ABC Pvt Ltd, holds 5,000 shares. He fills Form SH-13 and nominates his daughter, Priya, as the nominee.
Outcome:
If Mr. Ramesh passes away, Priya can apply to the company to have the shares transmitted in her name without the need for a legal heir certificate or probate.
🔍 Key Insight:
Until Mr. Ramesh is alive, Priya has zero rights. This is purely for post-death transmission.
🔹 Scenario 2 – Nominee under Section 89 (Nominee Shareholder – Structuring Purpose)
Situation:
A foreign investor, Mr. George, invests in XYZ Pvt Ltd but appoints Mr. Suresh (an Indian citizen) to hold the shares in his name, as Indian laws restrict direct ownership in certain sectors.
Action Taken:
- Mr. Suresh files Form MGT-4 declaring he is not the real owner.
- Mr. George files Form MGT-5 declaring he is the beneficial owner.
- XYZ Pvt Ltd files Form MGT-6 with ROC.
Outcome:
Mr. Suresh appears in ROC records, but he has no beneficial interest. Mr. George is the real owner and enjoys profits, votes, etc.
🔍 Key Insight:
This is used for corporate structuring, where someone holds shares on behalf of the true owner.
🔹 Scenario 3 – Misunderstood Nominee
Situation:
Mrs. Seema holds shares in PQR Pvt Ltd and mentions her brother’s name as nominee while thinking he’ll co-own the shares during her life.
Reality:
Legally, the nominee (under SH-13) has no right or ownership until she passes away.
🔍 Lesson:
Many people think “nominee” = “co-owner”. But under the Companies Act, that’s incorrect.
🔹 Scenario 4 – Nominee Shareholder Appointed by Promoter
Situation:
Mr. Arjun starts a company with two shareholders, but to fulfill the minimum shareholder requirement, he adds his driver’s name, Raju, as a nominee shareholder with 1 share.
Action:
- Raju signs Form MGT-4 saying he holds shares on Arjun’s behalf.
- Arjun signs Form MGT-5.
- Company files Form MGT-6.
Outcome:
Raju is just a dummy holder, Arjun is the true beneficial owner.
🔍 Common Practice:
This is typical in one-person led businesses trying to meet legal compliance.
🔹 Scenario 5 – Death of Shareholder Without Nominee
Situation:
Mr. Sunil dies holding 10,000 shares in LMN Ltd without filing a nominee.
Outcome:
His legal heirs have to get succession certificate, deal with probate or family settlements — delaying the transmission process.
🔍 Lesson:
Filing SH-13 for nomination avoids lengthy legal battles.
🔹 Scenario 6 – Illegal Use of Nominee Concept (Red Flag)
Situation:
Mr. Vijay puts his friend’s name as a shareholder to hide black money investments in Real Estate Pvt Ltd.
No MGT forms filed.
Outcome:
When disputes arise, ROC inspection reveals no beneficial ownership declared, leading to violation under Section 89 and penalty under Section 450.
🔍 Lesson:
Using nominee shareholders without disclosure is legally risky and penalized.
🧾 Conclusion of Scenarios
| Scenario | Type | Purpose | Forms Involved |
|---|---|---|---|
| 1 | Nomination under Section 72 | Death-based transmission | SH-13 |
| 2 | Nominee Shareholder (Structuring) | Privacy, foreign holding | MGT-4, 5, 6 |
| 3 | Misconception | Clarifies nomination is not co-ownership | SH-13 |
| 4 | Compliance Dummy Shareholder | To meet legal requirement | MGT-4, 5, 6 |
| 5 | No Nominee | Legal delay in transmission | — |
| 6 | Undisclosed Nominee | Illegal usage | Non-compliance |
✅ Final Takeaway
Just nominating someone doesn’t make them a shareholder.
Just being on paper doesn’t make you the real owner.
The Companies Act makes a very clear distinction between:
- Nominee for succession (Section 72) and
- Nominee holding shares on behalf of someone else (Section 89).
Make sure the right forms are filed, and the roles are understood, especially when advising clients or preparing resolutions or shareholding documents.