Nominee to Legal Heir Made Easy: SEBI’s New Framework for Seamless Securities Transmission

On 19-9-2025, the Securities and Exchange Board of India (‘SEBI’) issued a circular titled Ease of Doing Investment: Smooth Transmission of Securities from Nominee to Legal Heir. This directive aims to streamline the process of transferring securities from nominees to legal heirs, eliminate procedural bottlenecks, and reduce tax-related inconveniences, effective from 1-1-2026.

Key Points:

1. SEBI through this circular introduces a uniform reporting framework to simplify the transmission of securities and eliminate unnecessary tax burdens for nominees.

2. The circular is issued under the authority of:

   • Section 11(1) of the SEBI Act, 1992

   • Section 19 of the Depositories Act, 1996

   • Regulation 40(1) and Regulation 101 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

   • SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993

3. Originally, the appointment of a nominee in investment accounts was seen as a mechanism to ensure smooth succession.

4. SEBI formally recognizes the nominee as a trustee of the securities held by the original investor:

   • The nominee does not become the owner of the securities.

   • Instead, they act as a custodian who facilitates the transfer of securities to the rightful legal heirs as per the succession plan (will, inheritance laws, etc.).

5. This clarification aligns the nominee’s role with succession laws, ensuring that ownership rights are preserved for legal heirs.

6. Under the existing procedure, when a nominee transfers securities to a legal heir, the transaction can inadvertently be assessed for capital gains tax. This created issues because:

   • Clause (iii) of Section 47 of the Income Tax Act, 1961 clearly states that such transmission is not considered a “transfer” and is therefore exempt from capital gains tax.

   • Despite this exemption, nominees often face tax assessments and had to go through the cumbersome process of claiming refunds.

7. To address this issue, SEBI constituted a Working Group (‘WG’) that engaged with the Central Board of Direct Taxes (‘CBDT’). The WG recommended a standardized approach to reporting such transactions to prevent wrongful tax assessments.

8. The key recommendation was the introduction of Transmission to Legal Heirs (‘TLH’ code) to be used by all reporting entities when filing such transactions with the CBDT.

9. SEBI has directed the following entities to incorporate the TLH code into their reporting systems:

   • Registrars to an Issue and Share Transfer Agents (RTAs)

   • Listed Issuers

   • Depositories

   • Depository Participants

10. Using the TLH code ensures that such transmissions are correctly classified as non-taxable events, in accordance with the Income Tax Act.

11. TLH code simplifies tax reporting, ensuring the integrity of the transmission process is maintained, with proper documentation and verification. The procedural requirements for transmission are governed by:

    • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

    • Master Circular for Registrars to an Issue and Share Transfer Agents, dated 23-6-2025¹

12. All relevant market participants are directed to:

    • Take note of the new reporting requirement.

    • Make necessary system changes to accommodate the TLH code.

    • Ensure implementation by 1-1-2026.