SEBI Simplifies Transmission of Securities from Nominee to Legal Heir: A Step Towards Greater Transparency and Ease of Doing Investments

Introduction

Circulars issued by financial regulators such as the Securities and Exchange Board of India (SEBI) play a pivotal role in strengthening market integrity, promoting transparency, and ensuring uniform compliance standards. These communications serve as vital instruments for clarifying existing frameworks, introducing procedural enhancements, and streamlining operations for intermediaries such as Registrars, Depositories, Issuers, and Investors.

In line with its ongoing efforts to enhance investor protection and operational efficiency, SEBI issued a circular on September 19, 2025, titled “Ease of Doing Investment – Smoother Transmission of Securities from Nominee to Legal Heir.” The circular addresses a long-standing procedural and taxation challenge in the post-demise transfer of securities, a process that has often been mired in administrative complexities and unintended tax implications.

Key Highlights of the Circular

The circular, applies to:

• Registrars to an Issue and Share Transfer Agents (RTAs)
• Listed Issuers
• Depositories and Depository Participants

Its principal objective is to facilitate a seamless, tax-compliant transfer of securities from a nominee to the rightful legal heirs thereby minimizing procedural delays, tax disputes, and compliance burdens.

The Existing Framework and the Underlying Challenge

Upon the death of a security holder, the securities are initially transmitted to the nominee. However, under Indian succession law, the nominee is merely a trustee holding the securities on behalf of the legal heirs, not the absolute owner.

While Section 47(iii) of the Income Tax Act, 1961 explicitly exempts such transmissions from being treated as a “transfer” for tax purposes, the practical implementation often told a different story.
 In many cases, while transmitting securities from a nominee to legal heirs, tax systems erroneously treated the movement as a taxable event, thereby triggering capital gains tax.

Although refunds could be claimed subsequently, the process resulted in delays, administrative burdens, and unnecessary inconvenience to investors’ families. Recognising this gap, SEBI constituted a Working Group (WG) in consultation with the Central Board of Direct Taxes (CBDT) to identify and implement a sustainable solution.

The New Regulatory Intervention – Introduction of Reason Code “TLH”

Following detailed stakeholder consultations, the Working Group recommended a simple yet effective measure: the introduction of a standardised “Reason Code – TLH” (Transmission to Legal Heirs) for use by all market intermediaries when reporting such transactions.

Under this system, RTAs, Depositories, and Issuers will now report the transmission of securities from nominee to legal heir using this dedicated code. The “TLH” identifier will immediately signal to the tax authorities that the transfer qualifies for exemption under Section 47(iii) thereby eliminating the risk of wrongful taxation at the source.

This pre-emptive reporting mechanism enhances both compliance efficiency and investor convenience, providing clarity and certainty to all involved stakeholders.

Procedural Continuity

It is important to note that while the new circular introduces a tax reporting refinement, the existing procedural framework for transmission of securities remains unchanged.
 Entities must continue to comply with:

• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
• Master Circular for Registrars to an Issue and Share Transfer Agents (dated June 23, 2025, and as amended)

This ensures that the underlying due diligence, succession verification, and documentation requirements continue to operate as before — only now, with an improved tax compliance process layered in.

Implementation Framework

• Effective Date: January 1, 2026
• Applicability: RTAs, Listed Issuers, Depositories, and Depository Participants
• System Upgrade: Entities are directed to enable the “TLH” code within their reporting architecture to ensure seamless compliance.

The circular derives its legal authority from:

• Section 11(1) of the SEBI Act, 1992
• Section 19 of the Depositories Act, 1996
• Relevant provisions of SEBI (LODR) Regulations, 2015
• SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993

This statutory backing underscores SEBI’s mandate to regulate the securities market and protect investor interests through cohesive policy measures.

Stakeholder Impact and Benefits

For Nominees: Removes the risk of facing unwarranted capital gains taxation on a non-taxable event.

For Legal Heirs: Simplifies and expedites the transfer process, reducing delays caused by tax-related complications.

For Market Intermediaries: Provides a uniform and transparent reporting mechanism, reducing ambiguity and ensuring standardised compliance across entities.

For Regulators (CBDT & SEBI): Enhances inter-regulatory coordination, reduces scope for litigation, and bolsters investor confidence in the financial system.

Conclusion

The September 19, 2025, circular represents another milestone in SEBI’s broader agenda of improving India’s capital market ecosystem through rationalisation, investor-centric governance, and digital transparency.

By introducing the “TLH” reason code, SEBI has effectively bridged a long-standing procedural gap ensuring that rightful legal heirs receive securities swiftly and without undue financial or administrative distress.

This initiative epitomises SEBI’s continued drive towards achieving the Government’s “Ease of Doing Business” vision and reinforces India’s position as a jurisdiction where investor protection and regulatory innovation go hand in hand.

With implementation set for January 2026, stakeholders have sufficient time to align systems and procedures, ensuring a smooth and efficient transition that reflects the maturing sophistication of India’s securities market.