Stamp Duty Implications Arising Out of an Issuance and Transfer of Debentures of an Unlisted Company

As part of any transaction involving issuance of debentures by a company, or transfer of debentures of a company, a crucial question which often arises is as to determination of the stamp duty payable on such issuance or transfer of debentures. The answer to this question ultimately turns upon the nature of company - whether private or public (listed or unlisted). Whereas the Indian Stamp Act, 1899 addresses the question of stamp duty on debentures of public listed companies, there exists ambiguity on the exact levy of stamp duty payable on debentures of private and public unlisted companies. In this article, Sidharrth Shankar, Partner of J Sagar Associates, Advocates & Solicitors and Vatsal Gaur, Vth year Student National Law University, Jodhpur answer this exact ambiguity through analysing the correct position of law in this regard.

Debentures - Unlisted company - Stamp duty - Marketable Securities

Introduction

1. Ordinarily, an issuance of debentures attracts stamp duty under article 27 of Schedule I to the Indian Stamp Act, 1899 ('Stamp Act'). However, the stamp duty is payable only in such cases where the debentures are in the nature of marketable securities. Similarly, the relevant entry with respect to stamp duty on transfer of debentures is article 62 of Schedule I which also only envisages imposition of stamp duty on such debentures that are in the nature of 'marketable securities'.

1.1 'Marketable security' has been defined under sub-section (16A) of section 2 of the Stamp Act as "a security of such description as to be capable of being sold in any stock market in India or in the United Kingdom". As such, only those debentures that are issued by a public listed company and are tradeble on the stock markets are covered under the above mentioned charging entries in the Stamp Act. In the case of Chief Controlling Revenue Authority v. Kamala Sugar Mills Ltd. [2001] 1 MLJ 726 the Madras High Court held that for a debenture to fall within the ambit of article 27 of Schedule I it should be a 'marketable security' transferable either by endorsement or by a separate instrument of transfer or by delivery.

Stamp duty on issuance and transfer of debentures of an unlisted company

2. Stamp duty on issue of debentures, not in the nature of marketable securities - In the case of private companies or unlisted public companies, the debentures issued by these companies would not classify as 'marketable' and, hence, the question worth analysis is as to the exact nature of the stamp duty payable on such instruments.The Supreme Court in Narendra Kumar Maheshwari v. UOI [1989] 2 CLA 50 has defined a 'debenture' to mean essentially "an acknowledgement of a debt with a commitment to repay the principal with interest". A similar definition was arrived at by the MRTP commission in Director-General of Investigation & Registration v. Deepak Fertilisers & Petrochemicals Corpn. Ltd.[1994] 15 CLA 31 wherein it was held that a 'debenture' is simply an "acknowledgement of debt by the company whereby it undertakes to repay the amount covered by it and till then it undertakes further to pay interest thereon to the debenture holder".

On an understanding of the nature of debentures, the relevant entry under which stamp duty is payable on an issue of debentures (not in the nature of a marketable security) is article 5 of Schedule I under the heading 'Agreement'. In this regard, a number of precedents have held and recognised that a document containing an acknowledgement of debt which also includes a stipulation to pay interest on the debt amount becomes an 'agreement' -Firm Shiv Ram Punnun Ram v. Faiz AIR 1942 Lah 50 (FB) (I), Sukhdeo Prasad In re. AIR 1934 All 1052 and Manak Shaw v. Tara Chand AIR 1957 Raj 65. Thus, on this hypothesis, the stamp duty on an issuance of debentures by an unlisted company would be the same as applicable to an 'agreement' as prescribed under article 5 of Schedule I.

2.1 Stamp duty on transfer of debentures not in the nature of marketable securities - It is important to note that debentures have been regarded as 'movable property' under section 82 of the Companies Act, 1956 as amended by the Companies (Amendment) Act, 1999, with effect from 31st October, 1998. The only conflicting opinion, in this regard, is the MRTP Commission's decision in Deepak Fertilisers & Petrochemicals Corpn Ltd. (supra) wherein it held that "only such debentures which are secured by mortgage of immovable property or hypothecation or pledge of movable property can be regarded as goods, and any other kind of unsecured debenture would be in the nature of an actionable claim", and, thus, out of the purview of the term 'goods'.

However, considering the amendment to the companies Act was passed at a date later to the date of the judgment, the judgment only has limited applicability. A transfer of such debentures, may, therefore, entail payment of stamp duty under article 23 of Schedule I as a conveyance of movable property - debentures being in the nature of movable property.

Conclusion

3. Whereas the Stamp Act squarely addresses the question of stamp duty on debentures of public listed companies by virtue of an express entry under the Schedule to the Stamp Act only for those debentures being marketable securities, yet there exists ambiguity on the exact levy of stamp duty payable on debentures of private and public unlisted companies as debentures issued by these companies would not classify as 'marketable securities'. In view of the foregoing analysis of the legal position, it may be concluded that while an issue of debentures of an unlisted company may be stamped as an 'agreement' under article 5 of Schedule I, a transfer of such debentures would be regarded as a "conveyance of moveable property" under article 23 of Schedule I.

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