Sebi’s new guidelines for operation of accounts in case of an incapacitated investor

While reading about living trusts and retirement planning, I came across a very important regulatory update from SEBI – one that directly affects how your investments are handled if you become temporarily or permanently unable to sign documents due to a physical condition.

About the author: Manmohan Sethumadhavan is a freelancer, investor, and personal finance enthusiast “in search of the absolute truth.” You can follow Manu on Twitter @ManuTsr. He is the author of the popular Revised Capital Gains Taxation Rules Ready Reckoner for FY 2025-2026.

On January 10, 2025, SEBI released a circular revising and revamping nomination facilities in the Indian securities market, followed by an amendment circular on February 28, 2025. Based on these, a common Standard Operating Procedure (SOP) for all Depositories and Mutual Fund AMCs has been introduced, detailing how accounts can be operated in case an investor becomes physically incapacitated but remains mentally competent to contract. These changes will come into effect from 15th December 2025.

Empowering a Nominee to Operate During Incapacitation

An investor can now authorise one of their registered nominees (other than a minor) to operate the account if the investor becomes physically incapacitated. This means that even when you cannot sign documents due to illness or accident, your investments can still be managed – redemptions, switches, or other transactions – through an “empowered nominee.”

However, this facility applies only if you are still mentally sound and capable of entering into a valid contract under the law. The provision covers both single-holder and joint-holder accounts. However, for joint accounts, the clause becomes active only when all joint holders are simultaneously incapacitated. So if even one holder remains capable of signing, the usual operation continues. In case of joint accounts with “joint” operation, where one investor alone becomes incapacitated, the new rule does not apply, and the operation would not be possible.

The definition of incapacitation is quite specific. The investor should still have the capacity to enter into a contract as per section 11 of the Indian Contract Act, 1872. It covers only physical incapacitation – where the investor cannot sign due to illness or disability – but still has the mental capacity to understand and consent. People who are in a coma, unconscious, mentally unsound, or on life-support systems like ventilators do not fall within this category. In such cases, the operation of the account would follow legal procedures (such as court orders).

Investors are free to change nominees any number of times and may specify either a percentage or an absolute value of assets that the empowered nominee can encash. This limit is applicable to the investor at the PAN level in case of Mutual Funds, and for each demat account separately.

The process for implementation in an incapacitation

All this sounds like a welcome move and offers investors a sense of security. However, in practice, it may not be as simple as it appears on paper. The process of activating this facility involves several layers of verification, documentation, and in-person checks. 

• When an investor becomes incapacitated, a written request must be sent to the AMC or Depository Participant (DP) informing them of the situation. This can be done either by the empowered nominee or by any other person. The request must be accompanied by a medical certificate from a qualified doctor stating the reason for and duration of the incapacity.
• After receiving the request, a responsible officer from the AMC or DP must personally visit the incapacitated investor to verify the condition. Video calls are not allowed – the verification must be in person. This is to prevent misuse or fraud. 
• If the investor has not registered any nominee earlier, the incapacitated investor must first register a nominee and then assign that person as the “empowered nominee”, strictly under the presence of the officer. It’s a crucial clause since allowing someone to act on your behalf without proper verification could lead to serious misuse. Also, this is an area where collusion and fraud can happen. 
• During the verification visit, the officer must obtain the thumb or toe impression (or any mark) of the investor. The officer also has to explain the implications of empowering the nominee to act on the investor’s behalf.
• An independent witness, unrelated to both the investor and the AMC/DP, must also sign the document confirming this act. 
• Once all formalities are completed, the AMC or DP will take 48 hours (a cooling-off period) before allowing the empowered nominee to transact. 

The empowered nominee cannot change the investor’s registered bank account. All redemptions or withdrawals during this period will be credited only to the original bank account linked to the folio or demat account. No other service requests – like bank change, email/mobile update, or address change – can be made by the nominee.

While the new rules are a welcome step that gives investors peace of mind, the process is not as simple as it sounds. Each step involves multiple verifications, documentation, and in-person checks to ensure safety and prevent fraud. In reality, this facility might take time to implement smoothly, especially for elderly investors or those living away from urban centres. The requirement of in-person visits and independent witnesses may cause delays in urgent situations.

This new framework is a thoughtful reform meant to protect investors and prevent misuse of their assets. However, it is not a replacement for an emergency fund or joint holding arrangement.

Investors are advised to:

• Add a joint holder (with “Either or Survivor” operation) for quicker access, or
• Plan alternate arrangements such as trusts or power of attorney, especially for long-term contingencies.

The intent is good – to make sure your money can be managed safely even when you physically can’t – but like many regulatory processes, the execution might not be quick or easy.