Indian Stamp Act Amendments – New Dimensions to securities transactions

 CS Makarand Lele, Founder Bizfirst Professionals & Past President ICSI  

Indian Stamp Act (ISA) amendments were made effective from 1^st July 2020. The said amendments on one hand brought in rationalization in charging of duties on issue & transfer of securities for pan India transactions & on the other hand done away with the concepts of duty on securities certificates, letter of allotment, instrument of transfer & brought in the concept “Securities Transaction”. Amendment eliminates the conflict between state stamp act & central stamp act for charging of duties on transaction related to securities.

ISA amendment introduced definition of “securities” and added two new charging Section 9A & Section 9B enabling Government to charge duties on securities transactions. Title of new section suggests “instrument chargeable with duty for transaction”. Under said sections for charging of duty, element of transaction is essential than presence of instrument underlying transaction. The trigger point of charging duty would be transaction. Said sections emphasises issue & transfer of securities transactions. The securities are broadly defined to cover shares, debentures & all other related instruments.

These amendments also conclude affirmative on the issue, “whether stamp duty is to be paid when securities are issued in Dematerialized (Demat) mode or not?”

The amendments also casts responsibilities on depository, clearing corporation & stock exchange for collecting stamp duty before or at the time of happening of the transaction.

The entire corporate system in India is slowly moving towards electronic transaction. Companies Act 2013 now mandates all Companies (except private companies) to issue & transfer of securities only in Demat mode. Recent amendments in ISA are supportive to this process.

It would therefore be essential to understand, capture & adopt the exact intention of the ISA amendments while dealing with issue or transfer of securities.

What is Instrument?

Section 2(14) of ISA amended the definition of “Instrument” to include every document by which any right or liability is created or transferred etc. It also covers the electronic documents created for transaction in a stock exchange or depository & any other document stated in Schedule I of the Act.

According to me, this brings in its ambit resolution passed by the Company for allotment of securities or issue of delivery instruction slip or execution of transfer form created in physical or electronic form. When such document comes into existence, the duty is liable to be paid under ISA. The relevance of stamping & issue of securities certificate as stated in the Companies Act has now been lost. In case of issue of securities in Demat mode such timeline is immediate at the time of delivery of allotment list to depository or transfer slip to DP. For physical issue of securities, it would be immediate on date of allotment.

Instruments under amended ISA for charging of stamp duty

Securities Transaction

ISA amendments are covering Issue & sale/ purchase/ transfer of securities through all modes & in all forms & at any place in India. May it be physical, electronic or may it be delivery base or non-delivery base. Hence passing of resolution for allotment of securities or execution of transfer deed or any other instrument for transfer of securities or issue of delivery note or settlement of transaction on stock exchange will be termed as transaction and attract duty under the Act.

Allotment List (Section 2 (1))

Allotment list is a new concept introduced by ISA amendment. Companies Act in Section 56 uses the concept of “intimation of details of allotment of securities to depository” in case of demat issue of shares”. Allotment list is a list prepared by the issuer containing the details of allotment of securities & submitted to the depository. The said list could be prepared only after passing the appropriate resolution for allotment of securities by the Board of the Company.

Word “issue of securities” used in the ISA to be interpreted as allotment of securities in the context of the Companies Act.

Allotment list is an instrument which creates new entry in the records of depository. The depository is required to collect the stamp duty on such allotment from the issuer before amending its records.

The responsibility of ensuring payment of stamp duty on issue of securities in demat mode is now casted on Depository before amending its registry. In pre amendment era, it was most debated story and was nobody’s baby. This specific mention in the ISA plugs this specific loophole.

Debenture (Section 2 (10A))

Definition of Debentures is inserted by the ISA amendment act. The same in inclusive definition. It includes Debenture stock, bonds or any other instruments of a company evidencing a debt, whether constituting a charge on the asset of the Company or not; bonds in the nature of debenture issued by any incorporated company or body corporate; Certificate of deposit,  commercial usance bill, commercial paper and such other debt instrument of original or initial maturity upto 1 year as the RBI may specify from time to time; securitized debt instrument and any other debt instruments specified by the SEBI from time to time.

Market value of instrument (Section 2 (16B))

Market value is the basis for charging the duty on the instrument relating to securities transaction.

Market value in relation to an instrument through which securities is traded in stock exchange is trading price & for transfer of security not traded in stock exchange but through Demat mode & for physical transfer, is the price or consideration mentioned in such instrument.

This definition mainly deals with market value at the time of sale/ transfer of securities. Charging Sections 9A(1)(a), (c) & 9B(a) for issue of securities also has a reference of market value of securities, however there is no specific reference of issue of securities in Market Value definition. Therefore market value for issue could be price or consideration paid or payable for such securities. In case of Demat issue, it is to be stated in Allotment list & in case of physical issue it could be stated in the allotment resolution.

The Market Value of securities under the transaction will be determined in following manner:

In view of clear definition of Market value and requisite of element of consideration in stamp duty charging sections, there is no need to construe that face value of securities is a Market Value.

It is also to be noted that in case of non-availability of Market value (consideration or price) for transaction of issue of securities, there is no need to resort to face value of security & pay the stamp duty since duty is now payable on transaction for consideration & not on issue of script or certificate of securities.  

How to calculate market value for unlisted entities

Definition of market value provides that in case of physical transaction in securities, market value is a price or consideration mentioned in such instrument.  It would therefore be the price arrived at based on valuation norms & stated in allotment resolution & consideration stated in transfer form or any other instrument through which transaction is getting triggered.

It would be advisable to clearly state the consideration for issue of securities in allotment resolution or in allotment list to be given to depository. Section 9A(1)(c) states that manner of allotment list is prescribed by Central Government through rules. Government has clarified that Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 will continue to apply to the ISA amendments. According to Rule 6 of said rules, stamp duty chargeable on issue of securities in demat form shall be collected from the issuer before recording any transaction in the depository system. Issuer shall submit to the depository, the allotment list in respect of issue of securities at the time of allotment of securities.

Clashing point may arise for determination of price & consideration for issue of securities in physical mode by private company, when the same is not specifically stated in allotment resolution or if the resolution is only stating face value of securities. This could be resolved by providing appropriate valuation report to authority, if there is a question about payment of proper stamp duty in future.

Rationalisation of stamp duty rates

ISA amendments has substantially reduced the rates for charging stamp duty on securities transactions. ISA while fixing the rates for PAN India took the basis of stamp duty rates & collection of Maharashtra State. It has now introduced stamp duty on transfer of unlisted securities held in demat mode. It has also substantially determined the various parameters like value for charging the duty, mode of payment, responsibility of collection etc.

Comparative Analysis on revision in Stamp Duty Rates

**payable on debentures being marketable securities

#Prior to ISA amendment, only debentures being ‘marketable securities’ were liable to be stamped under Article 27 of Schedule I to the Act which deals with stamp duty on Debentures. The amended Article 27 omits the words “being a marketable security”. The Act therefore now seeks to charge stamp duty on issue of all types of debentures – marketable or otherwise.

Determination of transactions whether on delivery basis or non-delivery basis (Rule 4 of ibid)

The nature of a particular transfer of securities through a stock exchange or clearing corporations whether to be treated as on delivery basis or on non-delivery basis shall be determined by the clearing corporation at the time of settlement, as per established principles governing delivery.

In case of inter-operability of clearing corporations, the trades of a client across the stock exchanges shall be considered for determining whether the same would result in a delivery or not.

What is settlement day (Rule 2(h) ibid)

It means the day on which, –

(i) a transaction is settled by a stock exchange or an authorised clearing corporation, by completing the delivery of funds to the seller and delivery of underlying securities corresponding to those funds to the buyer; or

(ii) it is reported to a stock exchange or a clearing corporation specifying that the transaction in securities has been carried out provided the security is not held in dematerialised form with any of the depositories; or

(iii) an issue or transfer has been effected in a depository in respect of securities held in dematerialised form which may have to be later reported to the stock exchange or a clearing corporation.

This day is important as the stamp duty will be charged and collected by the Stock Exchange or the Depository or clearing corporation on the abovementioned specified day depending upon the nature of transaction.

Mode of payment of duty & liability to pay

Stock Exchanges/Clearing Corporation/Depositories are authorised by Indian Stamp (Collection of Stamp-Duty through Stock Exchange, Clearing Corporation and Depositories) Rules, 2019 to collect stamp duty for securities transactions under ISA.

For transaction through stock exchange or depository it is likely that stamp duty amount will be deducted or charged & is payable as a part of settlement of said transaction based on the market value. There is no discretion available to parties to determine the duty & pay it. It would be automatic collection process.

For issue of securities through demat mode, the duty shall be collected by depository from issuer before executing any transaction in depository system. Issuer shall submit to depository, the allotment list at time of allotment of securities (Rule 6 ibid)

Duty shall be collected by stock exchange, clearing corporation or depository on the entire sale consideration on transfer, even if the consideration is paid in part or in instalments.

For transfer of unlisted securities through Demat mode

The stamp-duty shall be collected before execution of all off-market transfers involving transfer of securities in the depository system. A depository shall collect stamp-duty on the consideration amount specified by the transferor in the delivery instruction slip (electronic or otherwise) and the consideration as reported to the depository shall be considered as the actual consideration amount (Rule 5 ibid).

For physical issue & transfer of securities, existing manner of payment of stamp duty continues. Issuer will pay the stamp duty on security certificate through online payment mode e-SBTR (Electronic secured Bank and treasury receipt). For transfer, payment will be made either by e-SBTR or by affixing adhesive transfer stamps of requisite value on transfer form & cancelling it

Under amended ISA, who is liable to pay stamp duty?

Liability of determination of market value, calculation of stamp duty & its payment

Issuer & transferor/ buyer may be required to justify price or consideration of untraded securities to depository as basis for charging the stamp duty. It looks like it would be automated system and unless the duty is paid, depository will not amend its records by giving effect of allotment or transfer.

Time line for payment of Stamp duty under amended ISA

 *Pursuant to Section 9B, a liability to pay stamp duty arises immediately on allotment of securities in physical mode. Mode of payment of stamp duty continues to be on Instrument through online payment mode (e-SBTR), hence there will be a need to immediately issue securities certificate for payment of stamp duty on it. The period of 2 months (for shares) & 6 months (for debentures) provided in the Companies Act for Issue of certificate becomes redundant now. 

Place of payment of duty in case of physical issue & transfer of securities

In case of physical issue of securities, the stamp-duty shall be payable by the issuer, at the place where its registered office is located.

In case of physical transfer of securities, seller will pay the stamp duty by affixing adhesive stamps purchased under ISA at the place where he is executing such transfer deed or will pay through e-SBTR mode under ISA.

Sharing of Duty with state based on location

Section 9A (1) provides for collection of stamp duty on behalf of State Government on sale/ transfer/ issue of securities through stock exchange, clearing corporation & depository.

Rule 3, 5 & 6 ibid describes the process of collection duty by stock exchange, clearing corporation & depository.

Section 9A(4) further provides for formula of sharing of stamp duty collected by Central government with respective state government  based on residence of the buyer.

Section 9B of ISA for issue & transfer of securities in physical mode, like section 9A of ISA does not provide for formula for sharing of stamp duty with the state. Hence to that extent on each transaction in physical mode, state is deprived of its benefits.

All these structuring read with enabling dematerialisation provisions under the Companies Act leads to a sign of introduction of mandatory demat of issue & transfer of securities for private limited company.

Effect of non-payment or under-payment of stamp duty

1. Instruments not duly stamped are liable to be impounded.

2. Instruments not duly stamped are inadmissible in evidence.

3. Every person who executes or signs otherwise than as a witness any instrument chargeable with duty without the same being duly stamped shall for every such offence be punishable with fine which may extend to five hundred rupees.

Rectification of non-payment/ under-payment of duty in case of securities transaction in Private Company in physical mode.

If it is subsequently found that stamp duty is not paid or under-paid then issuer/ buyer can pay the difference of stamp duty with penalty using e-SBTR.

An instrument not duly stamped or insufficiently stamped shall be admitted to evidence on payment of duty with which same is chargeable or the amount required to make up such duty, as the case may be together with the penalty of Rs. 5, or, when 10 times the amount of the proper duty or deficient portion thereof exceeds Rs. 5, of a sum equal to 10 times such duty or portion. (Section 35 of ISA).

Erroneous entries (Rule 9 ibid)

If a transfer was erroneously indicated as not involving sale consideration and the person wishes to rectify it, he shall do so, by informing the collecting agent within 3 weeks from the end of the month and pay the required stamp-duty.

If a person changes his domicile state, the collecting agent shall transfer the stamp-duty to that State Government as per the changed address, from the day the records of collecting agents are updated.

Any fresh or revised demand of stamp-duty payable pursuant to any dispute or adjudication proceedings may be recovered by the State Government in accordance with the provisions of the Act.

Can state charge separate duty on securities transactions?

State’s power of charging of stamp duty on securities (shares & debentures) transactions like issue of certificates, transfer of shares, memorandum, note or acknowledgement of issue or transfer, letter of allotment, etc becomes redundant on the Commencement of ISA amendments, in case of securities dealt through stock exchange or depository, as Section 9(3) specifies that No duty is payable on any such transactions or instruments under the state act. However said exemption is not specified for case of issue or transfer of securities in physical mode falling under section 9B. However the intention of ISA amendment is to collect the duty centrally and therefore even in absence of specific exemption, I am of the view that state will not demand any duty additionally on issue or transfer of securities held in state’s jurisdiction in physical mode.

 Stamp duty in case of issue of duplicate security certificate

Issue of duplicate securities certificate is not considered as issue of securities and thus will not get covered under ISA. It will continue to fall under respective state stamp act.  In case of Maharashtra, duty for duplicate or copy of securities certificate is to be paid at the rate specified under Article 27 of the Maharashtra Stamp Act which is, the same duty as is payable on the original, subject to maximum of Rs. 100/-.

Stamp duty in the case of transfer of securities pursuant to invocation of pledge

As per Rule 5(7) ibid Stamp duty shall be collected from the pledgee on the market value of the securities.

 Exemptions/Relaxations from payment of Stamp duty

ISA amendments granted following exemptions/relaxations from the payment of the stamp duty.

• Section 9A (1) (c) & Rule 6 (3) – No stamp duty on creation or destruction on specified corporate actions such as stock split, stock consolidation, merger and acquisition- NO beneficial ownership change.  In case where such Corporate actions lead to fresh issue, then stamp duty is payable.
• Sec 9A(1)(c) & Rule 6 (5) – Stamp duty on acquisition of securities of minority shareholders by the majority pursuant to the scheme of acquisition of minority shareholding routed through Company as a corporate action under section 236 of the Companies Act, shall be collected by the depository from the issuer (Company), instead of from the transferor.
• Sec 8A(a) – Issue of security certificate in favour of depository for the purpose of Demat will not be chargeable with a duty separately, when duty on issue of securities is paid by the issuer.
• Sec 8A(b)-Dematerialization of shares by a person by way of transfer to depository or re-materialization of shares by a depository by way of transfer to a person shall not be liable to duty
• Sec 9A(2) proviso – No stamp duty is chargeable for securities transacted through stock exchange or depository established in IFSC Zone.

Exemptions withdrawn by the ISA amendment act

• Transfer of Demat securities between beneficial owners is now chargeable with stamp duty
• Transfer of beneficial ownership of units of Mutual fund including UTI is now chargeable with stamp duty

Some upcoming challenges

• Charging of duty by unlisted company is linked to price or consideration and hence as per my understanding duty is not payable for transaction of transfer or sale without any consideration. This is rightfully excluding transmission or gift cases from payment of duty. However it is to be examined if gift deed or confirmation deed or any other instrument is additionally prepared than transfer form or delivery slip, then whether such instrument is liable to duty under state act or whether it can be excluded by taking advantage of exemption provisions of section 9A (3) prohibiting state to levy duty on any note or memorandum or any other document relating the said transaction of securities.
• In respect of issue of ESOP’s, duty will be calculated on exercise price being consideration for such issue even if the valuation is more than that at the time of vesting.
• As per amended ISA, the stamp duty is to be collected on market value which comprises of only price or consideration involved in the transaction. In case of issue of bonus shares, no consideration/ price is involved and thus, no stamp duty will be charged.
• Right issue of securities could be made at face value & does not require valuation as basis for issue. There may arise a situation that book value of such securities could be more than face value. In such case and going by the clear wording of definition of market price, there is no possibility for depository to lift the corporate veil & insist payment of stamp duty on book value of securities on the date.
• Issue of letter of allotment becomes redundant, since incidence of charging occurs immediately on issue of securities and could be not be prolonged till issue of security certificates.
• ISA covers sale, transfer or issue of securities & security has been defined in the ISA. LLP though a body corporate, do not issue securities & hence any “transfer of interest in LLP” is not covered under definition of “securities” as specified in ISA & thus not liable to any duty under ISA.
• Transfer of interest in LLP by retiring partner in favour of another partner or relinquishment of interest in LLP in favour of existing partners or transmission of interest in LLP to legal heir are some of the grey areas not falling under ISA as transaction in securities, nor specifically covered by Maharashtra Stamp Act, 1958.
• Stamp duty for transfer of securities becomes due & payable at the time of actual happening of transaction of transfer of securities. The trigger point of charging duty would be transaction. Also it is to be charged on instruments involved in actual transaction of transfer of securities i.e clearance list in case of stock exchange & delivery instruction list in case of demat & transfer deed in case of physical transfer. Thus agreement for acquisition/transfer of securities or sale of shares, do not trigger stamp duty under ISA. Also, said agreement is not an instrument for actual transfer of securities. However this agreement being an agreement creating right or obligation or joint venture or partnership is required to be appropriately stamped under state act.

Considering the several dimensions & new concepts introduced by ISA amendments, stakeholders are required to take sufficient professional care before advising or executing the transaction involving securities.

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