The Karnataka State Budget for the year 2011-12 was presented on 24 February, 2011. In line with the earlier budgets, Karnataka State Budget has proposed many changes in stamp duty rates. One of the key proposed changes is the reduction in the stamp duty rate on court order sanctioning the merger / demerger of companies.  We have highlighted below, two of the key amendments concerning the Mergers and Acquisitions.

i. Stamp Duty payable on order of a High Court in respect of Merger / Demerger:

In respect of an order made by the High Court under section 394 of the Companies Act, 1956 in case of merger / demerger of companies, stamp duty has been reduced from 3% to 2% in respect of the transfer of property and has been increased from 0.7% to 1% on the allotment of shares. The relevant article has been reproduced below:

Article No.20 (4) (i) / (ii): Amalgamation of companies, including a subsidiary amalgamating with parent company / reconstruction or demerger of a company.

Existing provisions Proposed provisions
The Stamp duty payable on a transfer is higher of the following:

  • 3% on the market value of the property of the transferor company, located within the State of Karnataka and transferred to the transferee company / resulting  company; or
  • An amount equal to 0.7% of the aggregate value of shares issued or allotted in exchange, or otherwise and in case of a subsidiary company, shares merged (or cancelled) with parent company and in addition, the amount of consideration if any, paid for such  amalgamation / demerger or reconstruction.
The Stamp duty payable on a transfer ishigher of the following:

  • 2% on the market value of the property of the transferor company, located within the State of Karnataka and transferred to the transferee company / resulting company; or
  • An amount equal to 1% of the aggregate value of shares issued or allotted in exchange or otherwise, and in case of a subsidiary company shares merged (or cancelled) with parent company, for such amalgamation / demerger or reconstruction.

2. Stamp duty payable on an agreement relating to sale of property, wherein there is no delivery of possession:

In respect of an agreement relating to sale of property, wherein there is no transfer of possession, the stamp duty has been reduced from existing 1% to 0.1%. Further, it has been also proposed that, if any reference is made in such agreement for sale, regarding a Power of Attorney having been given to the purchaser authorising him to sell the property, then such agreement will be considered as an agreement for Sale, wherein the possession of property is deemed to have been delivered and accordingly, stamp duty will be levied at 6% (i.e conveyance rate).

Though this amendment has been made in the context of immoveable property (clause `e’), this would also affect transfer of moveable property, as the clause ‘g’ dealing with moveable property makes a reference to clause ‘e’.

This amendment could have a bearing on slump sale transactions executed in the state of Karnataka.

Article No. 5 (e) (ii): Agreement relating to sale of immoveable property, wherein possession of the property is not delivered:

Existing provisions Proposed provisions
1% of sale consideration as set forth in the agreement for sale (Subject to a maximum of Rs. 20,000/-) 0.10 % of sale consideration as set forth in the agreement for sale (Subject to a maximum of Rs. 20,000/-)

Conclusion – To summarise, going forward, companies involved in merger / demerger in the state of Karnataka [in cases where stamp duty is payable based on property (movable & immoveable) transferred] would enjoy a saving of 1% on the stamp duty payable on the High Court order.

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