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Inheriting shares? You are in for trouble
Sucheta Dalal, MoneyLIFE | February 20, 2007
Anil Deshpande, one of three siblings, inherited shares of a leading corporate group and a multinational company under his late mother's Will. The family is fairly well-to-do and there were absolutely no issues over asset distribution and hence, there was no need for a probate of the duly notarised and uncontested Will.
In fact, two of the three siblings are naturalised American citizens and spend most of their time overseas. Anil assumed that claiming his inheritance was only a matter of completing the appropriate paperwork and that would be easily done. Instead, he finds himself caught in a mass of red tape that has no legal sanction but is universally used by companies to protect themselves from fraud.
The blue chip group first demanded a probate. It then relented and imposed other conditions which required the heirs of a deceased shareholder to fill out several forms, provide an affidavit and an indemnity to the company.
The performance of the heirs on indemnity has to be guaranteed by a third party Surety. The Surety in turn has to execute a separate form disclosing his financial status. In case he is a salaried person he has to mention his approximate annual salary or if he is owner of any accommodation the approximate value of the flat may be mentioned.
The sticky issue is the guarantee that is required to be provided by the Surety, along with his financial details. The MNC argued that the shareholder has to provide a security for protecting the company, as a custodian of genuine shareholders, in case of future litigation. And, "it would serve no purpose if the Surety is not financially sound."
So far as the company seeks an affidavit, and indemnity bond and a Surety, there is no problem. But isn't it unfair to ask a Surety to take on an unspecified financial obligation, for an unspecified period, and additionally have to provide financial records or put on line his financial assets?
All this, in a situation where he is not concerned, has nothing to gain nor is a beneficiary. As Deshpande says, "How can I ask someone to take on an obligation that I would have refused?"
Explaining its rules, one company told him that it requires "an assurance from a person of reasonable financial standing that he is a genuine heir under the Will." Deshpande asks, "Would the company accept a Surety whose net worth is, say, only Rs 1,000? Are rich people necessarily more trustworthy than poor people? And what would happen if their mother had bequeathed her shares to a poor and unrelated person. Would he ever be in a position to find Sureties"?
Clearly self-made rules are often absurd. Deshpande decided to check which is the law that imposed such one-sided conditions and found there was none. Companies had made up their own, completely one-sided rules, only because they could get away with them.
Deshpande's stand to the companies was simple: He did not question the requirement of a Surety or the need to co-sign an Indemnity Bond, but he said he simply cannot ask the Surety to disclose his financial information (on the Surety form).
The reasons for not filling out the Surety's financial information on the form according to Deshpande are: "We consider it un-civil and improper to impose on a friend/relative and ask him to disclose his financial information and/or take on the financial obligation when he has nothing to gain from the subject transmission of shares. If a Surety is required at all for the subject transaction, his responsibility should be limited only to assuring that the parties to the transactions are the only and genuine legal heirs of the deceased shareholder."
Deshpande backed his stand by looking up the legal position and seeking a specific legal opinion. He found that "the law does not require a Surety for the transmission of shares without legal representation -- under Hindu Law." And, when an action is taken as "part of the operation of the law" the company does not assume any liability for the action. Hence no Surety is required.
The act of transferring the shares according to a notarised Will of a deceased shareholder is a part of the operation of law, and is the company's legal obligation to transfer them.
Why haven't more people complained about these one-sided conditions? Because companies made it clear that if you do, you are suspect and will be subject to even greater scrutiny. There is no help from the regulators either. One Company Secretary told Deshpande, "Just for your information this practice is being followed by most of the well-governed companies in India and it is accepted by the Stock Exchanges and SEBI for many years."
I discovered the truth of this statement when I chased SEBI for over two months to get a written response on the legal position but drew a blank. Top SEBI officials verbally admitted that the indirect financial guarantee extracted from the Surety was not a legal requirement. But no rules were framed, because there were no complaints. But it is more likely that those who protested were not even heard.
Anil Deshpande has had to fight hard for well over a year to convince companies that his is a principled stand. It is not something that Indian companies are willing to hear since they hold all the aces. Going the legal route to make a point (which he was all set to do) would have involved an expensive and mentally fatiguing battle.
After my intervention and when the Securities and Exchange Board of India (SEBI) also forwarded Anil Deshpande's grievance, the blue-chip company decided to waive the requirement for the Surety to furnish his financial details. The MNC was approached later, but also did its share of tough posturing before agreeing to a similar waiver.
This is what its Company Secretary wrote, "While your instigative mail would tempt us to insist on all the necessary documents and face any legal case arising out of such insistence, as a good governance, we as a special case would waive the requirement of providing the financials of the Surety."
This is at best a compromise and hardly a satisfying solution. The silver lining to this sorry story is that SEBI Chairman M Damodaran entirely agrees with Deshpande and is convinced that it is unfair of companies to seek financial details from a Surety.
Damodaran says that SEBI will look into the issue and come up with rules that are fair, both to companies and individuals. It is but a small step that required a long battle. The moot question is, how constitutional is a regulation which binds an uninterested and non-beneficiary third party to an indemnity for an infinite period?
Sucheta Dalal is the Consulting Editor of MoneyLIFE. She can be reached at email@example.com