With the liberalisation and globalisation of economies, the business establishments are increasingly resorting to mergers, demergers and amalgamations in order to achieve better synergies including expansion or consolidation. They are collectively referred to as “arrangements”.
When such arrangements take place, in most cases, the immovable properties held by one company ( “transferor company”) are transferred to another company (“transferee company”) in terms of the respective schemes of mergers and amalgamations. This article attempts to outline the stamp duty applicable upon such mergers and amalgamations.
Companies Act 2013
When companies desire to merge or demerge or amalgamate, (including reverse mergers) the same has to be approved by NCLT (National Company Law Tribunal) under Sec 232 of the Companies Act 2013. Earlier, they were being sanctioned by High Courts till 15-12-2016. In case of listed companies, approval of SEBI is also required. Approval of CCI (Competition Commission of India) is also to be obtained if the asset value or the turnover amount or the newly introduced deal value exceeds the threshold limits prescribed in the Competition Act 2002. Cross border mergers, both inbound and outbound, are also taking place in terms of the FEMA regulations.
However, in the case of merger or amalgamation of two small companies, or between a holding company and its subsidiary company or the merger of two or more wholly owned subsidiaries , as a simplified procedure, the same is approved by the Central Government (Regional Director, Ministry of Corporate Affairs) and they do not have to go to NCLT. (Small company means a company whose paid up share capital is not more than Rs 4 crores and whose annual turnover is not more than Rs 40 crores as per the latest audited financial statements of the respective company)
Mergers and amalgamations typically involve two or more companies deciding to transfer their assets and liabilities to another company whether already existing or newly formed to achieve various objectives like cost reduction, increased revenues, better market share, or face competition or to diversify and enter new markets or to acquire new technologies.
When such arrangements take place, often, they involve the transfer of certain immovable properties from one or more companies to the transferee companies. In such instances, questions were raised as to whether such transfers had to be registered under the Registration Act by payment of registration fee and whether they attracted stamp duty under Indian Stamp Act 1899. These issues were being dealt with differently by different states until Supreme Court clarified the same in its judgement, “Hindustan Lever Vs State of Maharashtra” dated 18th November 2003.
Indian Stamp Act 1899
Indian Stamp Act 1899, which is a Central Act, deals with stamping of various instruments. This Act has demarcated the powers of the Central Government and the state Governments with respect to levy and collection of duties on various instruments. Accordingly, one of the items for which the state governments are empowered to collect duties pertains to stamp duty on sale and purchase of immovable properties. Thus, when the immovable properties are transferred by one company to another, pursuant to the scheme of merger or amalgamation, some of the state governments were demanding stamp duty on them while others were not. Therefore, there was ambiguity in this matter and the Supreme Court dealt with the issue comprehensively in its abovesaid judgement in the case, “Hindustan Lever Vs State of Maharashtra”.
Supreme Court Judgement
The Supreme Court, in the aforesaid judgement, examined whether the orders of the court on mergers and amalgamations were liable to be stamped as instruments of conveyance and whether the state governments had the authority to levy such stamp duty. The Apex court, after hearing the matter in full, held as follows:
1. “The State Legislature has the jurisdiction to levy stamp duty under Entry 44, List III and prescribe rates of stamp duty under Entry 63, List II of the Seventh Schedule to the Constitution of India. It does not in any way impinge upon any Entry in List I of the Seventh Schedule”. (List I is Union List: List II is State List: and List III is Concurrent List)
2. “The measure of charging stamp duty may be fixed or ad-valorem which is to be determined by the Legislature. The basis for computation of stamp duty can be determined by the State Legislature and it may be on the basis of the market value of the property transferred or at a fixed rate.”
3. “The order of the Court on merger or amalgamation or any such arrangement was liable to stamp duty wherever it resulted in transfer of properties and that such order passed by a Court would fall under the category of an instrument, that is “conveyance” that attracts stamp ”
4. The Indian Stamp Act 1899 defines “Conveyance” under Sec 2(10) as follows:
2(10): “Conveyance”. — “conveyance” includes a conveyance on sale every instrument by which property, whether moveable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by schedule I:
The term, “Inter Vivos”, means “between living persons”. It has been contended that the mergers or amalgamations between companies could not said to be – between living persons, as companies are not living beings. However, the Supreme Court held that the companies being artificial judicial persons, they are entitled to transfer properties under Sec 5 of the Transfer of property Act 1882 and therefore they fall within the meaning of “Inter Vivos”.
Thus, the Apex court settled all basic issues in this regard and held that the orders of merger or amalgamation have to be stamped as instruments of “conveyance” in accordance with the provisions of the concerned state governments where the relative assets are situated. (AIR 2004 SUPREME COURT 326)
Levy of Stamp Duty by states
It is noted that each state government has prescribed its own rates of stamp duty. Further, the rates are on ad valorem basis on the market value of the properties or ad valorem basis on the entire value of consideration involved in the merger or amalgamation, mostly, with a condition that the higher of the two would prevail.
For example, the rate in Maharashtra State is prescribed as follows:
“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.”
Similarly, several states have amended their stamp acts in such a way that they are able to collect stamp duty not only on the value of the immovable properties being transferred but also on the entire consideration (cash paid or shares issued) of the scheme of merger or amalgamation.
Stamp Duty in Tamil Nadu state
The Tamil Nadu Government issued a circular in 2018 that “in view of the judgement of the Hon’ble Supreme Court in “Hindustan Lever Vs State of Maharashtra ,”, the scheme of arrangement of merger, amalgamation or reconstruction approved under the Companies Act 2013 would fall within the definition of “conveyance” and that such court orders upon being presented for registration become leviable with stamp duty”.( The Inspector General of Registration, State of Tamil Nadu, Circular No.49282/P1/2018 dated 20.11.2018.)
Subsequently, the Govt issued a G.O. in 2019, (G.O.(Ms.) No.29 dated 01.03.2019) that such instruments were to be stamped at a reduced rate of 2% of the market value of the properties being transferred or at 0.6% of the aggregate value of the shares issued consequent to the merger/amalgamation which is treated as consideration. In a separate notification, the government also stipulated a registration fee of Rs 30,000 for registration of such instruments.
Later, the government issued another notification (G.O.(Ms.) No.47 dated 19.02.2020) which gave retrospective effect to the above notification on levy of stamp duty, as w.e.f. 01-04-1956.
It, therefore, follows that all the mergers and amalgamations and reconstructions that took place from 01-04-1956 onwards are liable to be stamped. However, if the property is situated outside the state, the same will not attract any registration or stamp duty in Tamil Nadu.
However, the High Court of Madras, in its judgement in the matter of “State of Tamil Nadu Vs M/s. Serene Estate Private Limited” dated 19 February, 2024 held that the second part i.e., the part of 0.6% duty on the aggregate value of the shares was not valid on the ground that the same could be levied only under legislative sanction and not through abovementioned executive orders and therefore the same stands struck down. As a result, the current status with regard to the stamp duty in the state of Tamil Nadu is 2% on the market value of the properties being transferred which are situated within the state.
Conclusion
In view of the foregoing, it is now well settled that the orders of merger or amalgamation, wherever immovable properties are involved, need to be presented to the Registration department for registration and the prescribed stamp duty has to be paid on the same as per the rates in force in the respective states. That would complete the process of mergers or amalgamations in India.
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