A nominee is an individual or entity that under financial terms gains access to assets and securities, including bank deposits, real property, and stocks, on behalf of the original owner. While serving as a trustee or guardian to safeguard assets in the absence of the actual owner, the designated party gets powers to conduct financial transactions.
Such an arrangement is helpful in circumstances involving ownership or transfer of assets after the death of the original owner. However, the rights of a nominee change, depending on the assets in question. For example, it can only be a custodian in a mutual fund but becomes an owner after the bank account holder dies. Even though it enjoys the same rights and liabilities, the actual owner retains all beneficial entitlement to the assets being taken care of.
- A nominee is a person or company that exercises exclusive rights over the assets, securities, and properties on behalf of the original owner. However, they tend to be the custodian only and not the owner, except the bank deposits.
- It acts as a trustee for mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks., a custodian accountCustodian AccountCustodial Account is a savings account at a financial institutions like banks, mutual funds, insurance companies, non-banking financial institutions, stockbrokers, etc., that is maintained mainly for the benefit of beneficiaries while it is continuously administered by a person termed as responsible person or custodian or the legally recognized guardian. for stocks trading, a successor to the bank account holder, and a registered owner of shares of a company.
- An investor can appoint the stockbroker’s non-trading company to hold its stocks via either pooled or solo account.
- In insolvencyInsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow. cases, creditors cannot claim the rights over an investor’s stocks held by the nominated company.
Nominating someone could have several purposes. In some cases, it is to grant a close or trustworthy person to claim the proceeds of bank deposits plus other investments post the demise of the asset owner. And in other cases, it could be assigned as a trustee of stocks owned by an investor in the financial marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.. Or it may act as the registered owner of shares of a firm to conceal the identity of the beneficial shareholderShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. from going public.
Identifying nominated parties beforehand makes the financial instruments accessible to the person-in-concern if the actual owners are not around. The extent to which they can enjoy the rights to assets depends on the type of assets.
In investment businesses, nominee accounts safeguard their assets and allow for faster transactions. Although safekeeping investors’ securities make nominated party legal owners, actual ownership rights still rest with the beneficiary.
Nominee In Stock Markets
The nominee definition means differently in stock marketsStock MarketsStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.. By holding stocks in a custodian account, the brokerage firm keeps investors in a safer zone. In trading, it acts as an intermediary between the stockbroker and the investor. It could be an individual or a non-trading firm given the trusteeship of the assets of an investor. But since assets are not registered in the name of investors, they are never directly linked to those.
In case investors turn bankrupt, creditors will never be able to cease this part of their ownership at any cost. It means the stocks held by the stockbroker’s nominee company will always remain safe. To hold stocks, investors can choose either a pooled or solo nominee account.
Also known as an omnibus account, it holds multiple investments made by different clients of a stockbroker. The stockbroker keeps track of the transactions or trades of individual investors and passes their share of profits accordingly. Moreover, stocks are held electronically in this account.
This account is for individual investors. However, like pooled account, stocks are registered in the name of a nominee company and not the actual owner or investor.
As per the instructions of investors, stockbrokers invest in stocks under the legal ownership of the non-trading firm. Later on, they calculate the traded amount and pass it on to the original stock owners. Given the risks associated with financial transactions, exchanges keep tabs on transactions occurring through these accounts in the stock market.
But since it is not a regular practice, stockbrokers may sell stocks and obtain cash after a trade without keeping a record of actual stock owners. While these accounts make trading cost-effective and efficient, the appointment of an insolvent non-trading or nominee company could lead to fraud and put real investors at risk.
Nominee in Bank
The nominee definition for the banks and financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. is different from stock trading. When opening a bank account, it is mandatory to nominate someone who can claim the deposits when the account holder dies. Doing so also protects the nominated individual from unwanted hassle in getting access to those funds. In other words, it safeguards the financial interests of the family members of the deceased.
Let us understand this through an example.
Melvin, a business owner, died of COVID-19, leaving behind his wife and 10-year-old son. Being well-off, he had enough savings and investments made to make life easier for his family members after him. But his wife had no idea of the investments made by her husband. Hence, she contacted the bank and had a conversation regarding the same with a representative. She came to know that Melvin nominated her for all his deposits and investments. Thus, things became easy for her as she could claim the funds needed for their livelihood.
It is worth noting that in the case of a joint bank account, the nominated person can claim the benefits only if none of the account holders is alive.
A nominee shareholder is an individual who lends their name to a company and, in return, becomes the registered owner of its shares. They appear to be the owners of the firms to the outside world, while the beneficial owner retains actual ownership. The concept has gained popularity due to business owners willing to keep their information off of public records so that no one gets to know about their company ownership.
The real owners might also appoint a nominee director. Most of the time, the nominated director and shareholder are the same person. When a nomination is made appropriately, the real owners can sell their shares, receive all benefits, and get the right to vote during the general meetings.
Since there is a potential risk of the nominated shareholder’s intentions turning evil, actual owners must have valid credentials to prove their rights over the company and its profits.
Frequently Asked Questions (FAQs)
A nominee is an individual or entity that takes care of assets, securities, or properties on behalf of the actual owner. In some cases, it may have the right to claim the funds if the original owner dies, as in bank deposits.
A nominated party tends to act as a caretaker, trustee, or guardian of an asset or property, not the owner. They take possession of the said assets in different scenarios, such as for safekeeping shares in the stocks market, getting the legal title of shares of a company, or claiming the bank deposits. In contrast, a legal heir succeeds the property of a deceased person or becomes its owner under a will or succession law.
Investors use these accounts when trading in the stock market. They represent the stockbrokers’ non-trading firms that legally hold stocks on behalf of the actual investor.
This has been a guide to What is Nominee and its Meaning. Here we discuss nominees in the stock markets and shareholders along with the bank. You may also have a look at the following articles to learn more –