Stamp duty on merger orders: A different approach

Stamping is a strangely innocuous term that invokes memories of a travelling daakiya or an album from a philatelist’s collection. However, for corporates and state governments, stamping is a term that weighs very heavy.

In essence, stamp duty is a service fee that any person, whether real or legally fictional, pays the appropriate government in order to give that document legal enforceability. From another perspective, stamp duty is a type of transaction tax.

Stamp duties are a significant source of revenue for states. As per Reserve Bank of India (RBI) data, in 2019, Maharashtra earned more than 10% of its total revenue receipts only from stamp and registration fees. At approximately ₹29,000 crore, it was the second largest individual component of the State’s revenue receipts, after sales tax revenue.

For corporates, the impact can be equally substantial. For example, as per the Maharashtra Stamp Act, on an order of amalgamation wherein there is some immoveable property of the transferor present in the state, the stamp duty payable can be up to 5% of the total consideration for the amalgamation (aggregating both the cash paid as well as market value of shares exchanged).

The stamp duty on court orders approving schemes of mergers, demergers, amalgamations and restructuring (“schemes”) is a relatively recent trend among Indian states. This trend began in the early nineties, and it was possibly only with the liberalisation of the economy and a resulting increase in corporate restructurings, both in frequency and value, that state governments realised the potential for revenue.

There have been issues around stamping of court orders sanctioning schemes, since the early nineties, but these have obviously evolved over the three decades hence. Some of the early issues have been conclusively settled by the Supreme Court’s judgment in Hindustan Lever & Anr v. State of Maharashtra & Anr. The issues decided in that case were:

(1) whether states are competent to levy stamp duty on court orders;

(2) whether court orders are instruments as defined by various stamp legislation;

(3) even if court orders sanctioning schemes are instruments, do they constitute conveyance as defined in stamp legislations?

The answer the Supreme Court gave to all of these questions was an unequivocal yes, which is why this article will not delve further into these questions.

Another settled issue that is important to briefly mention was decided by the Delhi High Court in Delhi Towers Ltd v. GNCT of Delhi. The Court relied on the Hindustan Lever case and decided that in a state’s stamp legislation, the definition of conveyance need not specifically refer to court orders sanctioning schemes, as the definition of conveyance is already wide and inclusive.

The High Court’s ruling only has persuasive power in other states, but it is a settled issue as the Court’s decision was mostly already covered in the Hindustan Lever case by the Supreme Court, even if not articulated exactly in the same manner. What this means is that a company planning a restructuring should not bother hunting down a particular state’s stamp legislation to see if it can find a loophole out of it. If the restructuring comes to the attention of that state, it will seek the associated stamp duty and have the weight of case law behind it.

However, these settled issues were fairly simplistic by today’s point-of-view. In both cases, the transferee’s immoveable properties were in the same state as the transferor’s registered office. India’s economic landscape has evolved drastically since the early nineties and the noughties (2000-2009). Mergers, demergers, amalgamations and restructurings now have immense complexities, and accordingly, issues around stamp duty have also mutated. These complexities are what will primarily be covered in this article.

As a quick aside, one must keep in mind that the initial intention of states was to benevolently simplify the process of stamping for corporate restructuring under schemes. Instead of executing several different sale and conveyance deeds, all of which would be executed and stamped separately, the states offered a way for restructuring companies to have a one-step solution to meet the statutory requirement. However, as is often the case with policy-making, unintended consequences somewhat derailed the original intent.

Modern problems with the stamping of court orders are linked to two factors:

(1) The sheer geographical spread of schemes, which was something that perhaps hadn’t been anticipated and

(2) Levy of ad valorem rates of stamp duty on not just the immoveable properties actually present in a state, but also on the whole consideration for the scheme (thereby indirectly including assets not present in that particular state). These factors have led to stamping of such court orders going awry.

To try and capture the scope of modern issues in this topic, a matrix has been created that seeks to capture most of the likely combinations that may emerge in any scheme, the associated instruments that would be chargeable and the suggested solution for each scenario.

In miscellaneous situations:

This seems sensible thus far, but note that the definition of "instrument" doesn’t restrict it geographically. Therefore, the only concern of the Act is that the instrument either be signed in-state or be signed out-of-state and then brought in-state and be related to some Maharashtra matter. Next, we need to determine how the Act categorizes a court order sanctioning a scheme. This is seemingly a simple issue, as Section 2(g) of the Act explicitly names such orders as conveyances. We then need to check Schedule I of the Act to determine the rate at which stamp duty is charged on our instrument.

Under Item 25(da) of Schedule I, we find a specific reference to the instrument, and the respective rate particularly for a scheme of amalgamation is:

10 per cent of the aggregate of the market value of the shares issued or allotted in exchange or otherwise and the amount of consideration paid for such amalgamation: Provided that, the amount of duty chargeable under this clause shall not exceed,—

(i) an amount equal to [5 percent] of the true market value of the immovable property located within the State of Maharashtra of the transferor company ; or

(ii) an amount equal to [5 per cent] of the aggregate of the market value of the shares issued or allotted in exchange or otherwise and the amount of consideration paid, for such amalgamation, whichever is higher.

Those dreaded words – ‘whichever is higher!’

From a layman’s point of view, the measure or rate of stamp duty for this instrument is immediately absurd. The State is essentially giving itself the power to charge an ad valorem stamp duty not just on the immoveable property in Maharashtra being transferred, but on the entire consideration for the scheme of restructuring, regardless of the role that the State plays in the overall transaction. The Maharashtra Stamp Act was referred to for this example, but this measure is the same for all states where explicit amendments to the stamp legislation have been enacted.

The following scenarios illustrate the scope of friction between corporates and various states viz-a-viz stamp duty on court orders sanctioning schemes. The first such scenario is in case the transferor and transferee companies are registered in States A and B respectively. The major part of the transferor’s properties are in State A, although a minor part may be in State B. Upon crafting a scheme of amalgamation whereby the transferor gets absorbed into the transferee, both companies are required by Section 232 (read with Section 230) of the Companies Act to approach the ‘Tribunal’ to obtain a sanction for the scheme. In this case, the Tribunal refers to the National Company Law Tribunal (NCLT). Each bench of the NCLT has a separate geographical jurisdiction, and therefore, the transferor would approach the NCLT bench of State A and the transferee would approach the NCLT bench of State B. Both NCLT orders thus obtained would be chargeable instruments as per the definition of ‘instruments’ in stamp legislation.

However, in this scenario, the worst case possible is if State A levies an ad valorem duty on the whole of the consideration (cash and shares exchanged) for the scheme of amalgamation and State B does the same. In essence, the merging companies will be paying double tax on the same transaction although the law only concerns itself with the separate documents i.e. the NCLT orders being charged and not whatever transaction they represent. This isn’t a fanciful scenario. In fact, in 2009, when Reliance Petroleum was absorbed into Reliance Industries, this was roughly what happened.

In another case, Grasim Industries, having its registered office in Madhya Pradesh, filed a scheme of amalgamation wherein the transferor was Dharani Cements, registered in Tamil Nadu. None of the properties of the transferor were situated in Madhya Pradesh. Regardless, as per Section 232 of the Companies Act, Grasim needed to obtain an order from the Madhya Pradesh bench of the NCLT sanctioning the scheme, which was treated as a conveyance instrument and the associated rate of duty charged in Madhya Pradesh.

These are just two of the real-world examples that can be fit into the matrix of situations. There are two proposed solutions which should be effective, albeit not entirely pretty. Firstly, take a scenario such as No 4 from the matrix, where a particular state derives competency to charge stamp duty on a court order simply because of the presence of the registered office of either the transferor or transferee in that state, but none of the properties that are actually to be transferred are located in that state. Both the transferor and transferee would have to seek NCLT orders sanctioning the scheme, as mentioned previously.

There is no doubt that the order of the NCLT in the transferor’s state is an ‘instrument’ as per the Stamp Act definition. After all, the order ‘records a right’ of the company at the very least. Since the order is an instrument, it goes without saying that stamp duty is chargeable on it in the transferor’s state. However, the important question is whether the NCLT order in the transferor’s state is a ‘conveyance’ or not. Conveyance across stamp legislation, and even in the general understanding of the word, is an instrument "by which property, whether moveable or immoveable, or any estate or interest in any property is transferred to, or vested in, any other person, inter vivos" (from the Maharashtra Stamp Act). 

By this definition, if none of the properties to be transferred are located in the transferee’s home state, then the order of the NCLT in the transferee’s state is not a conveyance instrument at all. If the home state for the transferee company were Maharashtra in the given example, perusing Schedule I of the Maharashtra Stamp Act, we can see that after obtaining an order from the NCLT Maharashtra bench, the transferee should pay stamp duty on the order under Item 5 i.e. ‘Agreement or its records’, within which, in the author’s opinion, sub-section (h)(B) would apply ‘if not otherwise provided for,’ for which the applicable stamp duty is a flat one hundred rupees.

As mentioned earlier, the offered solution isn’t pretty. The transferee’s home state in the given example would undoubtedly challenge the categorization of the NCLT order. But the facts and the law would be on the transferee’s side, primarily because in the definition of "conveyance" in stamp legislation as highlighted earlier, it is clear that a conveyance instrument deals with the transfer of property. It is also imperative that the property being transferred in the chargeable conveyance instrument be within the jurisdiction of the concerned state for the following reasons:

(1) By Article 245 of the Constitution, states are empowered to enact laws for ‘the whole or any part of the State.’ This means that for a state to be competent to enact a law applicable to a person, there needs to be some nexus between the activities of that person and the state. In the Hindustan Lever case, the properties to be transferred were present in Maharashtra itself. Therefore, once the Court ruled that court orders were ‘instruments’ under stamp legislation, there was no real doubt that the court order was a conveyance and that Maharashtra was competent to apply that categorization as such. However, when the properties being transferred in a scheme are outside the state seeking to levy stamp duty, there is clearly no nexus between the property being transferred and the state.

(2) The state stamp legislation itself impliedly admits that stamp duty is leviable only on instruments where the subject matter is within the state. Taking again the example of the Maharashtra Stamp Act, Section 3 guides the reader on which instruments are chargeable. Section 3(a) simply makes all instruments mentioned in Schedule I of the State and executed within the State liable for stamp duty. A simple reading of only this sub-section would lead to the conclusion that any instrument, even if it deals with properties outside the state, as long as it is signed in the State, is liable for stamp duty.

But this would lead to absurd situations – imagine two businessmen from Kolkata meeting in a Mumbai hotel and deciding to sign an agreement for transfer of a property situated in Kolkata. If a Maharashtra revenue official happened to be sitting nearby and witnessed and overheard the execution of the agreement, could the businessmen then expect to pay stamp duty in Maharashtra simply because they put pen to paper in the State? Clearly that would be against the spirit of the law and highly onerous on persons in India.

Moreover, Section 3(b) mentions that instruments executed outside the State, subsequently brought into the State and related to property or some matter within the State, are liable for stamp duty. If instruments signed outside the State are liable for duty in the State only when related to properties within the State than why should the situation be any different for instruments signed within the State?

The State could, of course, simply amend the rate of duty for  the ‘records of agreement’ category and insert a reference to court orders on schemes, thereby charging the same ad valorem duty on the entire consideration for the scheme. However, this would likely lead to economic chaos and a significant number of companies would leave such a state, not only to escape arduous duties, but also because legislative arbitrariness is not conducive to the business environment.

To end the point on this first solution, we’ll loop back to the earlier example of Grasim’s amalgamation with Dharani Cements. That transaction had actually ended up in the Madhya Pradesh High Court, which effectively ruled that the presence of Grasim’s registered office in Madhya Pradesh was sufficient nexus to enable the State of Madhya Pradesh to levy stamp duty on the order of the Madhya Pradesh bench of the NCLT. However, in that situation, Grasim had not pleaded to categorise the order of the Madhya Pradesh bench of the NCLT as a ‘record of an agreement’ or a similar instrument, but had instead pleaded that the order was not an instrument at all, and thus not chargeable in Madhya Pradesh.

Thus to my knowledge, no one has yet challenged the categorization of an NCLT order as a ‘record of agreement’ rather than a conveyance. As a point of concern, in its judgment, the Madhya Pradesh High Court had noted that "the Madras High Court order dated 14/03/2001 including the Indore High Court order dated 9/03/2001 in respect of amalgamation of Dharani Cement Ltd. with Grasim Industries Ltd. is an instrument of conveyance." However, it is not clear whether this sentence is to be treated as a ratio decidendi of that case or as obiter dicta. 

The second action mentioned in the matrix of situations is to carefully craft the scheme of restructuring itself. Let’s take situation 3 from the matrix - the registered offices of the transferor and transferee are in State A and the properties to be transferred are in State A as well as in State C and State D. The worst case situation (and ostensibly what is presently the norm) is that the NCLT order on the scheme of conveyance is the document relied upon to execute transfers of properties in all states concerned, and each state charges duty on the order as a conveyance deed. A company could ostensibly end up paying an ad valorem rate on the total consideration of the scheme multiple times. Of course, some state stamp legislation such as the Maharashtra Stamp Act have set-off sections (Section 19) wherein instruments signed outside the State and brought into the State can be levied a lower stamp duty by setting off the stamp duty already paid outside the State. However, this would be cold comfort to companies caught up in such a scenario.

The scheme of restructuring agreed between a company and its stakeholders or between two or more companies is a private arrangement. As such, the terms of that scheme are within the purview of the parties to define as long as they don’t fall foul of any existing statutes. The tribunals' role in approving schemes of restructuring as laid out in Section 232 of the Companies Act (read with Section 230) is essentially to review the final scheme and ensure that the rights of a majority of stakeholders are not infringed, that dissenting creditors and shareholders are offered a way out of the scheme and finally, that public interest is not hurt by the scheme. In fact, the Supreme Court in the Hindustan Lever case reaffirmed its role by quoting itself in the famous case of Miheer H Mafatlal v. Mafatlal Industries Ltd.

"The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire."

Hence, the parties to the scheme are well within their rights to frame it such that it clearly mentions that properties in States C and D (from the above example) have been agreed to be sold and conveyed via transfer deeds to be executed separately from the scheme. In this case, the NCLT order would be stamped wherever necessary as a ‘record of agreement’ or similar category and ad valorem stamp duties would only apply to the separate transfer/conveyance deeds. This would also alleviate the inherent ‘double taxation’ that has been carrying on thus far. It is in the delicate crafting of the scheme that the skills of the company lawyers and taxmen will shine.

Again, this is not a pretty solution and a state looking to extract as much revenue as it can from a transaction may still proffer a challenge to the solution by attempting to charge conveyance on the court order sanctioning the scheme, itself rather than on the separate conveyance deed. However, such a scheme that carefully spells out the manner in which conveyances will take place, would surely bypass the challenge. Again, the reader should remember that the judiciary has no skin in the game, apart from ensuring that it serves its role as per Sections 230 to 232 of the Companies Act.

This solution does dilute the usefulness of schemes of restructuring and does roll back the initial intention of state legislatures in making specific references to court orders sanctioning such schemes in their stamp legislation. However, in the interest of evidence-based law-making, it is always important to reflect on the actual performance of any law and be ready to make modifications as and when needed.

The long-term benefit from any dispute between a state and restructuring companies because of either of the solutions mentioned is that it is likely that either the Central government or the judiciary would then be compelled to take steps to sort out this tangled web such that a balance between the needs of the states and corporates is found.

Apart from a few stragglers, modern Corporate India no longer sees its interactions with statutory authorities as a zero-sum game. To a large extent, there is evidence that various state governments are also minded to think the same way. But it would be apt to end these thoughts by reminding the reader that at this delicate stage of India’s growth story - when we are enjoying the sunset of our demographic dividend - we all should encourage the pie to grow bigger and bigger, rather than trying to gobble it up before our neighbour does.

Ashok Gupta is a practising advocate based in Mumbai. He was formerly Group General Counsel at the Aditya Birla Group.