Overhaul of debenture related stamp duties

13 February 2020

The Finance Act, 2019 (act), has amended the Indian Stamp Act, 1899 (stamp act). The amendments will come into effect on 1 April 2020 and this column summarizes the key amendments to the provisions affecting debentures.

Debenture was not previously defined in the stamp act and the definition in the Companies Act, 2013, was used. Now, there is an inclusive definition of debenture. In addition to debentures it includes (a) bonds in the nature of debentures, (b) certificates of deposit, commercial usance bills, commercial paper and other instruments with maturity up to one year as specified by the Reserve Bank of India, (c) securitized debt instruments, (d) other instruments as specified by the Securities and Exchange Board of India, and (e) any other instrument of a company evidencing a debt, whether constituting a charge on its assets or not.

Another change has been to the stamp duty payable under article 27 of schedule I in the case of issuance, transfer and reissuance of debentures. Before amendment, stamp duty was required to be paid in the case of issuance of debentures only if they were treated as marketable securities, that is securities capable of being traded on any stock exchange. Debentures issued by way of a stamped and registered mortgage deed were exempted from payment of duty. Under the proposed amendments to the stamp act, duty payable on debentures is now: (a) 0.005% where debentures are issued, and (b) 0.0001% where debentures are transferred and reissued. Unlike before, the amended article 27 does not differentiate between secured and unsecured debentures, or marketable and non marketable debentures. A striking feature is that there is no cap on the amount of stamp duty payable. Prior to the amendment, some states had prescribed the amount of stamp duty payable on the transfer of debentures. It appears that the stamp duty in relation to the transfer of debentures under the revised article 27 will replace any such duty.

New sections 9A and 9B provide for ascertaining liability to pay stamp duty and to collect duty on the issuance, sale or transfer of securities. Under section 9A (a) where any sale of securities is made through a stock exchange, duty shall be paid by the buyer of securities on their market value and the stock exchange or its authorized clearing corporation shall collect the duty on behalf of the state government; (b) where any transfer of securities is made by a depository, duty shall be paid by the transferor of such securities on the consideration payable and the depository shall collect the duty on behalf of the state government, and (c) where the issuance of securities results in a creation or change in the records of the depository, duty shall be paid by the issuer on the total market value and the depository shall collect the duty on behalf of the state government. Under section 9B, (a) where issuance of securities is made other than through a stock exchange or depository, duty shall be paid by the issuer on the total market value, and (b) where a sale, transfer or reissuance of securities is made other than through a stock exchange or depository, duty shall be payable by the seller, transferor or the issuer on the total market value of the securities.

A new section 4(3) has been inserted which provides that where securities are issued, sold or transferred through a stock exchange or a depository in accordance with section 9A, duty will be paid only on the principal instrument. Section 4(3) seems to suggest that once stamp duty on the principal instrument has been collected by the stock exchange or the depository in accordance with section 9A, no further duty is payable on any other instrument, including any security document, relating to the transaction.

Previously, duty in respect of debentures under article 27 was paid on the debenture trust deed, but pursuant to the amendments, the debenture trust deed will now only be stamped in accordance with the legislation of the relevant state on the basis of the instruments created under such deed. However, under the constitution, documents pertaining to security creation fall under the state list and questions may be raised in case of non-payment of duty on such documents in accordance with the legislation of the relevant state.

The act has crucially changed the stamp act. It streamlines stamp duty rates and payment procedures with respect to debentures. With the new definition of debenture and the amended article 27 of schedule I duty is levied on all debentures whether listed or unlisted, secured or unsecured. However, under section 4(3) in the case of secured debentures, the security documents may not need to be stamped.

SNG & Partners has offices in New Delhi, Mumbai and Singapore. Aditya Vikram Dua is a senior associate and Arjit Sahni is an associate.