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Stamp Duty Shocker For Consortiums!

Published on Fri, Aug 21,2015 | 22:31, Updated at Mon, Aug 24 at 16:40Source : CNBC-TV18 

Last week, the Supreme Court delivered a stamp duty shocker for consortium financing arrangements. It said that in such deals stamp duty is applicable on individual transactions! Here’s the back story…

Coastal Gujarat Power is an SPV set up by Tata Power for the Mundra Ultra Mega Power Project. It secured consortium financing from 13 lenders with SBI as the appointed lead trustee or security trustee. Coastal Gujarat Power executed a mortgage agreement with SBI and paid Rs 4,21,000 as stamp duty on it. But the Gujarat Revenue Authority claimed total stamp duty payable as RS 54,62,000. Revenue argued that the forming of a consortium and a single mortgage deed instead of several distinct instruments of mortgage was done to evade stamp duty. The Gujarat High Court disagreed with revenue–it held that stamp duty is payable on instruments and not on transactions. But the Supreme Court set aside the High Court decision. It said the mortgage agreement can ‘safely be regarded as 13 distinct transactions’. It has ordered Coastal Gujarat Power to pay the deficit 50 lakh rupees of stamp duty. The amounts involved may not seem substantial, but this decision will have significant bearing on all such consortiums deals. To talk about that, CNBC TV18’s Menaka Doshi is joined by M R Umarji, former Chief Legal Advisor, IBA and Ashwin Ramanathan of AZB.


Coastal Gujarat Power Case
-    Tata Power SPV for Mundra UMPP
-    Secured consortium financing from 13 lenders
-    Consortium appointed SBI as Lead Trustee


Coastal Gujarat Power Case
-    Company paid Rs 4,21,000 as stamp duty on mortgage agreement with Lead Trustee
-    Revenue claimed Rs 54,62,000 as stamp duty payable


Coastal Gujarat Power Case

Revenue argued
‘Respondents had formed the consortium and had executed the present mortgage instead of several distinct instruments of mortgage with the sole purpose of evading Stamp Duty.’


Coastal Gujarat Power Case

Supreme Court Order

‘On proper construction of this indenture of mortgage it can safely be regarded as 13 distinct transactions which falls under Section 5 of the Act*…’

August, 2015

*Gujarat Stamp Act, 1958

M R Umarji, former Chief Legal Advisor, IBA

Ashwin Ramanathan of AZB.

Below is the transcript of M R Umarji’s and Ashwin Ramanathan's interview with CNBC-TV18's Menaka Doshi

Doshi: How do you assess this Supreme Court decision? Do you agree at how the Supreme Court has arrived at this final outcome?

Umarji: Basically stamp duty is a tax on a document. So, there could be a situation where there are mortgage by deposit of Title Deeds which are created without executing any document. There is a transaction of transfer of interest in an immovable property but no document is executed, so no stamp duty is paid.

Now, since it is tax on a document the transactions which have undertaken behind that document namely in this case here were 13 lenders. So, therefore 13 documents should be deemed to have been executed is not correct because you can't look at the transaction, you have to look at the document and document was only one, the property on which mortgage was created was only one. The borrower was only one, so therefore there is no question of treating it as multiple transactions.

Doshi: But the document does represent 13 different agreements or sets of agreements, right?

Umarji: True, but then it is mortgage created in favour of - there could be a joint documentation which there could be a transfer of property which is in favour of three persons and that doesn't require a joint ownership of properties permissible. Similarly a joint lending - this is a long standing practice which is prevailing in the banking industry.

Doshi: I am glad you said that. It is a long standing practice and yet you have revenue arguing that in fact consortium financing is actually a device to evade stamp duty?

Ramanathan: Yes, absolutely. I agree with everything that Mr Umarji said. In fact I would actually go one step further to say not only obviously there aren't 13 different agreements to create mortgage there is only one, I would actually go on to argue that there is actually just one transaction of mortgage. It is just that there are 13 beneficiaries of that transaction through the security trustee and that is really important - and just segueing into the last point that you made about the fact that it is a long standing practice it absolutely is very much a long standing practice for consortium lending where there are several lenders involved with varying degrees of exposure that security is always created in favour of one centralised agency who then sort of manages and administers the security interest on behalf of all of the lenders and in that sense the Supreme Court decision has probably raised more questions than answers in terms of - this is the decision for this particular case but what of all of the cases that have followed exactly the same practice for literally decades now.

Doshi: Whether we agree or disagree with how the Supreme Court arrived at it this is now the final word so it seems. So, can you sort of outline what you think the scope of impact of this decision is going to be? Is revenue going to pick up the principle articulated by the Supreme Court here and apply it to multiple different situations not just of consortium financing?

Ramanathan: There are parallels to be drawn here between what happens in the case of consortium financing like this and what happens in the case of debentures. Non-convertible Debentures are a popular method of financing, have actually gained in popularity over the past few years, in no small part by the way to the efforts of both SEBI and RBI to try and deepen the corporate bond market. So they are a popular instrument.

It is absolutely the norm that a Debenture Trustee is always appointed in cases of debenture issuances and the fact that securities created in favour of the Debenture Trustee. Now the Debenture Trustee obviously holds the security for the benefit of all of the debenture holders. In a public issue of the debentures there could literally be thousands of debenture holders and then do you stretch the logic of this judgement to then apply to that kind of situation and say that literally that one document of mortgage or one document of pledge whatever security has been created in favour of the Debenture Trustee whether that now actually constitutes or should be regarded as actually thousands of different creations of security which may be going a bit too far but I can't see how the logic of this judgement doesn't apply equally or doesn't translate equally into the debenture situation.

Doshi: So, this is in a sense opening Pandora's box according to you?

Umarji: Yes.

Doshi: What is the resolution then to this because if the scope of impact is as wide as the two of you have discussed then how do you resolve this because it is clear the supplies across the country even though this was a matter in Gujarat?

Umarji: On the one hand the states need to look at this and examine the issue and try to keep the stamp duty rates at a moderate level because it will impact every step. State governments have been relying on stamp duty as a major source of revenue and it is impacting the entrepreneurship in the country in fact.

Now in a case like this where Rs 4 lakh has become Rs 54 lakh, the company will have to think in terms of recovering that costs by increasing the tariff or by some other means, it will ultimately affect the consumer. So, therefore the state government has to bear in mind that credit is the driving force of the economy. As far as legally the right of the union government is concerned there is an entry in the concurrent list which refers to stamp duty other than the rates of stamp duty.

Now in exercise of this power in the concurrent list in two three laws the central government has declared exemption from stamp duty. One recent one is of factoring regulation act where assignment of receivables in favour of a factor which is exclusively otherwise within the purview of the states has been given exemption. No stamp duty can be levied.

Doshi: So, are you suggesting that a similar exemption must be extended to consortium financing?

Umarji: Could be extended. Central government will have a power to do that at least in case of debentures and some such instruments which are issued to the public.

Doshi: And what does that entail. It entails just a legislative change or more than just a legislative change?

Umarji: A legislative change.

Doshi: Solutions? Are there ways to structure out of this? How are your clients responding to this, how do we get out of what the Supreme Court has created for us?

Ramanathan: The clients are responding quite anxiously as you might imagine. It is not a happy situation trying to structure around it while the jury is out on sort of what kind of structures might be acceptable. It is important to make the point that this was the structure that was devised in order to reduce the impact of stamp duty. I wouldn't say it was evasion of stamp duty, it is certainly avoiding stamp duty and there are well settled Supreme Court decisions, particularly in the context of fiscal and taxing statutes that actually say that adopting structures that minimise taxes is perfectly legal as long as it doesn't amount to evasion and that is really over here, which is was there a genuine attempt to evade stamp duty, A: it was clearly sort of in keeping with conformity with market practice as has been established over a period of several years now and B: it basically did actually adopt the structure whereby only one document was required to be executed.

The impact unfortunately of the judgement is, it disregards the trustee on behalf of a trust as a single counter party and looks through the trustee to the actual beneficiaries of the trust. There are at least a couple of other examples where a similar trusts operate on the same principles, mutual funds being one and all mutual funds are set up as trusts with a lot of investors standing behind.

A transaction with a mutual fund simply cannot be regarded as a transaction with all of the individuals that are beneficiaries of that mutual fund.

So, it is still too early to say if there are any structures that can withstand the impact of the judgement. Technically speaking, the judgment is rendered in relation to the Bombay Stamp Act as applicable to Gujarat, there are other states that have different Stamp Act and there is the Indian Stamp Act itself. Neither of those are directly impacted by the judgement but that said, the same language appears in all of those stamp acts as well.

So, at the very least the judgement is going to have highly persuasive if not binding effect on all other courts as well and therefore all other states. So, for the time being it may be a little too early to sort of talk about alternative structures. There may be none, frankly, given that the whole trust structure was the way that had been devised by the industry, by market participants several years ago to mitigate the stamp duty issue.

Doshi: So, effectively what you are telling me is that companies have to just prepare to pay for more because since the Gujarat Revenue Department has had success with this it won't be too much to suggest that many other state revenue departments will also seek to apply this very same principle in consortium financing at least to begin with right now and therefore companies ought to prepare to pay a lot more stamp duty than they earlier were when they work with groups of lenders?

Ramanathan: Absolutely and until sort of reliable structures can be come up with to sort of counter this effect companies have to sort of be prepared to just lump it and bear the higher costs.

Umarji: All the states will try to get more revenue by applying this judgement and it will - I am also worried that what will happen to the past cases.

Doshi: You think they might in fact start retrospectively applying this?

Umarji: There is nothing like retrospective, it is just an interpretation of the law, section 5 which was interpreted in the Bombay Stamp Act. Similarly worded section is there in the Indian Stamp Act which is of 1899. So, the law is always there.

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