Sebi proposes standard code for smooth transfer of securities to heirs

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Capital markets regulator Sebi on Tuesday proposed the introduction of a standard reason code to streamline the transfer of securities from nominees to legal heirs and ensure appropriate tax treatment for such transactions.

In a consultation paper, Sebi suggested introducing a specific reason code 'TLH' (Transmission to Legal Heirs) to be used by registrars, depositories and other reporting entities while intimating the Central Board of Direct Taxes about such transmissions.

The move seeks to enable proper application of the provisions of the Income Tax Act, 1961.

Currently, transmission of securities from nominee to legal heir of the original holder, some transactions are being treated as normal sale of securities.

This has resulted in capital gains tax being levied on nominees, even though clause (iii) of Section 47 of the Act does not consider such transmissions as "transfers" for tax purposes, Sebi said.

The regulator noted that the nominee merely acts as a trustee for the benefit of legal heirs of the original security holder and ultimately the securities which belong to the legal heir(s) are transmitted by the nominee to such legal heir(s).

The proposal follows deliberations by a working group comprising registrars to an issue and share transfer agents (RTAs), which engaged with multiple stakeholders.

Based on the working group's recommendations, the markets watchdog has sought to make the reporting process more consistent and transparent.

The procedural requirements for transmission of securities will continue governed under the Sebi's LODR (Listing Obligations and Disclosures Requirements) Rules, 2015, and the Master Circular for RTAs dated June 23, 2025, as updated from time to time.

The Securities and Exchange Board of India (Sebi) has invited public comments on the draft circular till September 2.

Sebi said RTAs, listed issuers, depositories and depository participants will be required to make necessary system changes to adopt the 'TLH' code within three months of the issuance of this circular.