Part I (Amendments to the Indian Stamp Act, 1899) Chapter-IV of the Finance Act, 2019 deals with crucial changes to the provisions of the Indian Stamp Act, 1899, as amended ("Indian Stamp Act") relating to stamp duty for issuance, transfer and sale of debentures ("Amendments to Stamp Act") and comes into force on 9 January 2020 for securities (including debentures). At the same time, Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 ("Rules") also comes into force from 9 January 2020. This article summarises the impact of the Amendments to Stamp Act on the debenture market in India.

The Earlier Stamp Duty Structure for Debentures

Under Article 246 of the Constitution of India, 1950 ("Constitution of India") stamp duty is payable on various specified documents, which includes documents relating to issuance of debentures. Under the earlier regime, debentures that qualify as "marketable securities " attract stamp duty under Article 27 of the Indian Stamp Act. Article 27 of the Indian Stamp Act exempts debentures issued under a mortgage deed registered and stamped appropriately under the relevant State stamp duty. In addition, currently security documents in relation to secured debentures are stamped in accordance with relevant State stamp laws.

The Need for Change in the Stamp Duty Regime

According to industry experts, one of the major impediments in developing a stable corporate bond market has been the fragmentation and cost brought about by the stamp duty regime in India. Several expert committees studied market trends and made recommendations to the Government. The first major one was under Dr. R.H. Patil on corporate bonds and securitization in India in December 2005 ("R H Patil Report") and suggested that rationalisation of stamp duty structure across the country is crucial to develop the corporate bond market in India. This point has been reflected in multiple subsequent reports such as 2008 "India's Bond Market- Developments and Challenges Ahead" prepared by Asian Development Bank, 2009, Dr. Raghuram Rajan, "A Hundred Small Steps" Report ("Raghuram Rajan Report") to the Government of India. More recently, the report of the working group on development of corporate bond market in India submitted to the Reserve Bank of India on 12 August 2016 under Shri Harun R. Khan ("HR Khan Report") made 4 major recommendations for rationalising stamp duty to boost the corporate bond market in India. These were that stamp duty on debentures: (a) should be made uniform across states; (b) should be linked to the tenor of securities; (c) should be capped; and (d) re-issuance of the same security should be included for the purpose of cap, in order to encourage re-issuances. These recommendations were made since currently the stamp duty rates differ in each State and increase issuance cost as well timing.

The aim of the amendments is to ensure a centralised collection mechanism and also to ease the operational aspects of issuer's paying stamp duty as well as avoiding having to pay stamp duty on multiple documents. From a revenue collection perspective it also avoids rate shopping to achieve reduced rates by issuers issuing debentures under registered mortgage deeds secured by property in the States with lowest stamp duty.

Debentures – an Exhaustive Definition?

The definition of "debentures" which was previously limited to "marketable securities" is no longer limited to marketable securities and now includes unlisted debentures issued by private or public limited companies. In addition the definition no longer just covers debentures, but also other instruments that are classified as such as certificate of deposit, commercial usance bill, commercial paper, securitised debt instruments and such other debt instrument up to 1 year as the Reserve Bank of India may specify.

Changes to Stamp Duty Rates for Debentures

Article 27 of the Indian Stamp Act has been amended so stamp duty is 0.005% for issuance of debentures and 0.0001% for transfer and re-issue of debentures . It is worth noting that there is no cap on the payment of stamp duty as against the existing duty of 0.05% per year of the face value of debentures subject to a cap of 0.25% of Rs. 25 lakhs, whichever is lower or if issued pursuant to a registered mortgage deed creating security, then the stamp duty is in accordance with the mortgage deed rate. Further, all types of debentures, whether secured or unsecured and whether marketable or not, now attract stamp duty at the same rate.

Another challenging aspect is with respect to the stamp duty proposed on the transfer and re-issuance of debentures. The HR Khan Report recommendation exempting re-issuance of the same debentures from the stamp duty has not been accepted. This might act as a bottleneck in encouraging re-issuance of debentures.

Stamp duty on Multiple Documents

Under the Amendments to the Stamp Act, for any issue, sale or transfer of securities, the instrument on which stamp duty is chargeable is the principal instrument and no stamp duty is charged on any other instruments relating to any such transaction. For:
issue of debentures, any creation or change in the records of a depository is made, the stamp-duty on the allotment list is collected based on the total market value of the securities – payable by the issuer;

sale of any securities on the stock exchange, stamp-duty is collected based on the consideration amount – payable by the buyer. However, if any security is sold otherwise than through a stock exchange- by the seller of such security;

other transfer of securities, stamp duty payable on the total market value of the securities – payable by transferor; and

any other instrument not specified in the Indian Stamp Act- by the person making, drawing or executing the instrument.
"Market value" means (a) the trading price of any security which is traded on a stock exchange; (b) price or the consideration for any security transferred through a depository but not traded on a stock exchange; and (c) the price or consideration mentioned in the instrument for any security not dealt with on any stock exchange or depository (physical debentures).

Stamp Duty on Secured Debentures

A plain reading of the new section 4(3) of the Indian Stamp Act suggests that security documents for secured debentures issued are exempted from stamp duty since once stamp duty is paid to the stock exchange, clearing corporation or depository, as the case may be, then under section 4(3) of the Stamp Act introduced by the Amendments to the Stamp Act, no other stamp-duty is payable on any other instruments relating to any such transaction. For secured debenture issuances, it is customary to have a deed of hypothecation, share pledge, personal or corporate guarantee. In addition, the Amendments to Stamp Act, it is clear that no stamp duty is charged or collected by the State Government on any note or memorandum or any other document, electronic or otherwise, associated with issuance, transfer or sale of debentures. However, it should be noted that instruments related to security creation (by way of hypothecation, share pledge, personal or corporate guarantee) are in the State list in relation to stamp duty under Entry 63 of List-II (State List) of Seventh Schedule of the Constitution of India and so not stamping these could be contraversial. However, any new legislation will always have practical industry aspects to consider in implementation which will be resolved over time. What is clear at least is the amounts collected in respect of the issuance of debentures are paid over to the State Government.

Stamp Duty Collection

A crucial change introduced in the stamp duty regime is collection of stamp duties on behalf of the States. Now stamp duty will be collected by: (i) the stock exchange; (ii) a clearing corporation authorised by such stock exchange to collect stamp duty where security sales are made on a stock exchange; or (iii) for transactions not on a stock exchange, the depository ("Collecting Agents"). Under section 9B of the Indian Stamp Act, if an issue of securities is made by an issuer in any manner other than through a stock exchange or depository, the stamp duty is payable by the issuer of such issue at the place where its registered office is located and in case of sale or transfer or reissue of securities, the stamp duty on each such sale or transfer or reissue is payable by the seller, transferor or issuer, as the case may be.

The relevant Collecting Agent can deduct 0.2% of the stamp-duty collected on behalf of the State Government as a facilitation charge before transferring amounts to the relevant State Government . Collection Agents can be fined from Rs.1 lakh up to 1% of the amounts to be collected or transferred to the State governments if they fail to collect or transfer.

Conclusion – Some Take Aways

By way of the Amendments to the Indian Stamp Act, the Indian Government has tried to rationalise the rates and payment mechanism for stamp duty on debentures. Further, there are several open issues at present, for instance whether the Indian States will try to impose further stamp duty for security documents in relation to an issuance of debentures or whether section 4(3) is clearly applicable to all eligible security created so that only the principal instrument being the debenture trust deed is stamped.

The Government proposal establishing a co-ordination council ("Coordination Council") under Article 263 of the Constitution of India comprising of representatives from the Central Government and States Government to facilitate operational and implementation issues to ensure the Amendments to the Stamp Act achieve the desired market facilitations objectives. The Coordination Council is responsible for making recommendations to the Government regarding review or revision of stamp duty rates. However, the Government is yet to notify rules in this regard.

A cap on stamp duty would have brought more certainty to the stamp duty regime. Whilst the changes will reduce stamp duty for most debentures issuances, but for large issuances over Rs.5,000 crore the stamp duty will be in excess of Rs.25 lakh (which was the maximum amount prior to the Amendments to the Stamp Act). However, as a general matter we believe the changes will achieve uniformity and affordability.

In addition, the Amendments to Stamp Act categorise certificates of deposit, commercial usance bills, commercial papers and other debt instruments of original or initial maturity up to 1 year as both "securities" and "debentures" which may cause confusion on rates since rate for transfer of securities is 0.003% (non-delivery basis) and 0.015% (delivery basis) but for transfer of debentures is 0.0001%.
Under section 8A(c)(ii) and (iii) of the Indian Stamp Act prior to the Amendments to Stamp Act there was an exemption for stamp duty for securities (including debentures) transferred in demat form. Now for transfer of ownership of dematerialised debentures there will be a cost, which was not there previously, and this may hinder the trading and liquidity creation required for the development of the corporate bond market in India.

We believe that these initiatives go a long way to encouraging more corporates to effect bond issuances. This is particularly the case now with the Securities Exchange Board of India circular dated 26 November 2018 on fund raising by issuance of debt securities by large entities ("SEBI Circular on Large Corporates") which mandates that a Large Corporate must raise at least 25% of its borrowings, during the financial year subsequent to the financial year in which such large corporate is identified as a large corporate, by way of issuance of listed debt securities. A "Large Corporate" for this purpose means a listed entity having its securities listed on a recognised stock exchange and long term borrowing of Rs. 100 crore or above (excluding ECBs and inter-corporate borrowings) and having a credit rating of "AA and above. The SEBI Circular on Large Corporates came into effect on 1 April 2019 except for those entities, which follow a calendar year as their financial year, where the circular is effective from 1 January 2020 and together with the Amendments to the Stamp Act will push Indian corporates to issue debentures. Upfront stamp duty collection will assist quick and easy collection by State Governments, bring consistency of rates and affordability for the majority of the issuances. The cost of collection through physical stamping or other organisations will also be reduced. A unified legal and institutional infrastructure enables States to collect stamp duty on debentures and other securities at one point in time and through specified and regulated Collecting Agents. This is a progressive move by the current Indian Government.

Originally published on 06 January 2020

The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at for any queries.