The Finance Act, 20191 (Amendment) proposes to make some significant amendments to the Indian Stamp Act, 1899 (Act). The primary objective of the Amendment is to set up a zero-evasion centralised collection mechanism under which stamp duty is collected through one agency, at one place and on one instrument for securities market transactions.
It also seeks to standardise the stamp duty payable on issuance, sale and transfer of securities market instruments. It does so by removing multiple instances of stamp duty, waiving stamp duty on certain instruments, and removing the ability of the State Governments to determine rates or levy stamp duty in addition to the Act.2
As of now the Amendment is not yet in force and will come into force when notified by Central Government.
While the objectives of the Amendment are generally laudable, on a specific analysis of the Amendment from the perspective of debenture transactions, the Amendment has given rise to a few questions. This two-part piece analyses the Amendment as applicable to debenture transactions and discusses the issues that may need to be deliberated upon for future debenture transactions once the Amendment becomes effective.
This first part examines the significant modifications proposed to be brought about by the Amendment in relation to debentures and its effect on the debenture transactions once the Amendment becomes effective.
Decoding the Amendments to the Indian Stamp Act, 1899 for Debentures – Part II analyses a few specific issues arising from the interplay between the definitions of 'debentures' and 'securities' under the Amendment, and issues relating to the implementation of a centralised collection mechanism (CCM), a collection strategy introduced by the Amendment to collect stamp duty on certain trades through a single agency.
Existing Stamping Arrangement
Under the existing stamping regime, only debentures which qualify as 'marketable security' (i.e. being capable of being sold in any stock market in India or the UK) attract stamp duty under Article 27 of the Act. The term 'debentures' is not defined separately in the Act. In case of mortgage debentures, if the mortgage-deed is stamped and registered appropriately (which mortgage would be subject to relevant State stamp legislations), the debentures are exempt from stamp duty. Transfer of debentures is liable to stamp duty under the relevant State stamp legislations.
As a result, only a portion of the debenture transactions in India are liable to stamp duty under the Act, with most others being stamped for other aspects of the transaction under the relevant State stamp legislations.
Key Amendments Proposed
The Amendment seeks to bring about key changes relevant to debentures, as discussed below.
Establishing a CCM (Section 9A)
Under the CCM, it is proposed that stamp duty, as per the rates set out in Schedule I, will be collected on behalf of State governments, by the relevant stock exchanges, clearing corporation or depositories (Collection Agencies). The CCM is applicable for instruments that fall under the definition of 'securities' under the Amendment (referred to as 'eligible securities' for the sake of convenience).
The stamp duty so collected will then be transferred to the State government where the buyer resides, on a periodic basis, after deduction of facilitation charges payable to such Collection Agencies.
For the issue of securities transactions that are not routed through a stock exchange or depository, the relevant stamp duty, as per Schedule I of the Act, is to be paid by the issuer at the place where its registered office is located.
The Amendment also penalises Collection Agencies for failing to either collect or transfer under the CCM, by way of fines ranging from Rupees one lakh up to 1% of the amounts to be collected or transferred to the State governments.
Definition of Securities
Currently the Act uses the term 'securities' in Section 8A3 and draws the definition from the Securities Contract (Regulation) Act, 1956 (SCRA) for the purposes of that section. The Amendment now seeks to define 'securities' to include:
- 'Securities' as defined in the SCRA.
- Derivatives as defined in the Reserve Bank of India Act, 1934.
- Certificates of deposit, commercial usance bills, commercial papers, repos on corporate bonds and other debt instruments of original or initial maturity up to one year.
- Any other instrument declared by the Central Government.
Stamp Duty on Debentures
The Amendment reduces the rate on issue of debentures payable under Article 27 of the schedule to the Act from 0.05% of the face value4 to 0.005% and introduces a rate of 0.0001% on transfer and re-issuance of debentures.
Definition of Debentures
The Amendment proposes to define 'debentures' to include:
- Debenture stock, bonds or any other instrument of a company that evidences debt.
- Bonds in the nature of debentures issued by companies and body corporates.
- Certificates of deposit, commercial usance bill, commercial paper and other debt instruments of original or initial maturity up to one year.
- Securitised debt instruments.
- Other debt instruments specified by the SEBI from time to time.
Stamp duty on Transfer of Dematerialised Securities
Section 8A of the Act presently exempts payment of stamp duty on transfer of beneficial ownership of securities on a depository. This exemption stands removed.
Exemption of Stamp Duty on Secondary Instruments
The Amendment introduces a sub-clause (3) in Section 4 of the Act by which, once stamp duty is collected by a Collection Agency as per Section 9A, the instrument on which such stamp duty is collected will be deemed to be the principal instrument for the purpose of section 4 of the Act5 and no stamp-duty is payable on any other instrument relating to such transaction6.
How will these Changes Affect Debentures once the Amendment is Effective?
First, all debenture issuances will now attract stamp duty under the Act. Post the Amendment, the stamp duty as levied by Article 27 would be payable in respect of issue, re-issue of sale of all instruments falling within the definition of 'debentures', whether marketable securities or not. While it may be open to discussion whether all debentures would fall within the definition of 'securities', interestingly, the definition of 'debenture' or the revised language in Article 27 does not use the term 'securities' and therefore the outcome of the analysis on whether all debentures would qualify as securities for the Act, would not impact the levy of stamp duty on all debentures.
Second, every issuance of debentures would now be subject to an ad valorem stamp duty of 0.005% (as against the existing duty of 0.05% per year of the face value subject to a cap of 0.25% of Rs. 25 lakhs, whichever is lower). By virtue of the reduction in the rate of stamp duty but the removal of the cap, while the issuance of erstwhile marketable debentures may become cheaper, larger issuances of debentures may become expensive.
Third, considering that stamp duty payable on secondary instruments is exempted, where secured debentures are issued and such debentures are eligible securities, it may be argued that no separate stamp duty may be payable on the security documents in connection with such debentures.
Fourth, the existing exemption available for mortgage debentures has been done away with, thereby increasing the cost of secured debentures, in cases where the debentures issued are secured but not eligible securities.
Fifth, with the removal of the exemption from stamp duty presently available for transfer of ownership of dematerialised securities, trading in dematerialised debentures may become expensive.
1 Part I of Chapter IV of the Finance Act, 2019.
2 See proposed Section 9A (3) of the Act.
3 Section 8A provides exemptions in relation to securities dealt with in a depository.
4 This rate is subject to a cap of 0.25% of Rs. 25 lakhs, whichever is lower.
5 Under Section 4 of the Act, when several instruments are employed in a transaction of sale, mortgage or settlement, the principal instrument will be chargeable with full stamp duty as per stamp duty schedule annexed to the Act and all other instruments will be chargeable with a nominal duty instead of the duty prescribed for such instruments in the stamp duty schedule.
6 The placing of this exemption in Section 4 is questionable because not all transactions subject to the centralized collection mechanism could be classified as sale, mortgage or settlement (for e.g. issuance of securities).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.