Background
Syndicated loans
are quite common in lending transactions. In large loans, a single bank may not
be in a position to provide the loan by itself. Hence, the loan is syndicated
such that “two or more banks agree to make loans to a borrower on common terms
governed by a single agreement between all parties.”[1] Similarly, a common
security trustee is appointed to receive and hold the security provided by the
borrower, which is held for the benefit of the common lenders.
are quite common in lending transactions. In large loans, a single bank may not
be in a position to provide the loan by itself. Hence, the loan is syndicated
such that “two or more banks agree to make loans to a borrower on common terms
governed by a single agreement between all parties.”[1] Similarly, a common
security trustee is appointed to receive and hold the security provided by the
borrower, which is held for the benefit of the common lenders.
The issue of stamp
duty on the mortgage provided by a borrower to a security trustee for the
benefit of syndicated lenders came up before the Supreme Court in Chief
Controlling Revenue Authority v. Coastal Gujarat Power Ltd.
Specifically, the question was whether a single mortgage executed in favour of
the security trustee for the benefit of several syndicated lenders would be
treated as a single document or as multiple documents (equivalent to the number
of syndicated lenders). The Supreme Court concluded that the agreement ought to
be construed separately for each syndicated lender and stamped as such (i.e.
multiple documents).
duty on the mortgage provided by a borrower to a security trustee for the
benefit of syndicated lenders came up before the Supreme Court in Chief
Controlling Revenue Authority v. Coastal Gujarat Power Ltd.
Specifically, the question was whether a single mortgage executed in favour of
the security trustee for the benefit of several syndicated lenders would be
treated as a single document or as multiple documents (equivalent to the number
of syndicated lenders). The Supreme Court concluded that the agreement ought to
be construed separately for each syndicated lender and stamped as such (i.e.
multiple documents).
Facts and
Decision
Decision
The borrower,
Coastal Gujarat Power Limited, required finance to set up a power project. Thirteen
lenders, who were banks and financial institutions, formed a consortium to
undertake the lending. They executed a security trustee agreement appointing State
Bank of India as the security trustee. The borrower executed an “Indenture of Mortgage
for Delayed After Assets Deed” with the security trustee, and paid stamp duty
of Rs. 4,21,000 on the document. This was disputed by the revenue authorities
who demanded a total sum of Rs. 54,62,000 on the document. The dispute landed
before a Full Bench of the Gujarat High Court, which opined that the State of
Gujarat is not entitled to recover any additional stamp duty, and that “stamp
duty is payable on instruments and not on transactions”. The High Court found
that there was only one instrument creating the mortgage and that the
relationship between the borrower and security trustee is independent of the
relationship between the borrower and the lending banks. It was also
categorical that the single mortgage deed cannot be treated as a combination of
thirteen lenders.
Coastal Gujarat Power Limited, required finance to set up a power project. Thirteen
lenders, who were banks and financial institutions, formed a consortium to
undertake the lending. They executed a security trustee agreement appointing State
Bank of India as the security trustee. The borrower executed an “Indenture of Mortgage
for Delayed After Assets Deed” with the security trustee, and paid stamp duty
of Rs. 4,21,000 on the document. This was disputed by the revenue authorities
who demanded a total sum of Rs. 54,62,000 on the document. The dispute landed
before a Full Bench of the Gujarat High Court, which opined that the State of
Gujarat is not entitled to recover any additional stamp duty, and that “stamp
duty is payable on instruments and not on transactions”. The High Court found
that there was only one instrument creating the mortgage and that the
relationship between the borrower and security trustee is independent of the
relationship between the borrower and the lending banks. It was also
categorical that the single mortgage deed cannot be treated as a combination of
thirteen lenders.
The Gujarat
revenue authorities appealed against this decision to the Supreme Court, which
analysed the documentation structure and found (at para. 28) that “it is
manifest that the instrument of mortgage came into existence only after
separate loan agreements were executed by the borrower with the lenders with
regard to separate loan advanced by those lenders to the respondent borrowers”.
The principal question therefore relates to the stamp duty payable where
several matters (or transactions) are contained in a single instrument. This
was tested against the provisions of section 5 of the Gujarat Stamp Act (the “Act”),
which is extracted below:
revenue authorities appealed against this decision to the Supreme Court, which
analysed the documentation structure and found (at para. 28) that “it is
manifest that the instrument of mortgage came into existence only after
separate loan agreements were executed by the borrower with the lenders with
regard to separate loan advanced by those lenders to the respondent borrowers”.
The principal question therefore relates to the stamp duty payable where
several matters (or transactions) are contained in a single instrument. This
was tested against the provisions of section 5 of the Gujarat Stamp Act (the “Act”),
which is extracted below:
Section 5 – Instrument relating
to several distinct matters or distinct transactions. Any instrument comprising or relating to several distinct matters
shall be chargeable with the aggregate amount of the duties with which separate
instrument, each comprising or relating to one of such matters or distinct
transactions, would be chargeable under this Act.
to several distinct matters or distinct transactions. Any instrument comprising or relating to several distinct matters
shall be chargeable with the aggregate amount of the duties with which separate
instrument, each comprising or relating to one of such matters or distinct
transactions, would be chargeable under this Act.
Based on a reading
of this and related provisions (sections 4 and 6 of the Act), the Supreme Court
held:
of this and related provisions (sections 4 and 6 of the Act), the Supreme Court
held:
31. From bare reading of these provisions, it is clear that …
Section 5 deals only with the instrument which comprises more than one
transaction and it is immaterial for the purpose whether those transactions are
of the same category or of different categories.
Section 5 deals only with the instrument which comprises more than one
transaction and it is immaterial for the purpose whether those transactions are
of the same category or of different categories.
32. It appears from the trustee document that altogether 13 banks
lent money to the mortgagor, details of which have been described in the
schedule and for the repayment of money, the borrower entered into separate
loan agreements with 13 financial institutions. Had this borrower entered into
a separate mortgage deed with these financial institutions in order to secure
the loan there would have been a separate document for distinct transactions.
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.
lent money to the mortgagor, details of which have been described in the
schedule and for the repayment of money, the borrower entered into separate
loan agreements with 13 financial institutions. Had this borrower entered into
a separate mortgage deed with these financial institutions in order to secure
the loan there would have been a separate document for distinct transactions.
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.
The Supreme Court
also relied upon The Member, Board of
Revenue v. Arthur Paul Benthall, 1955 SCR 84 in arriving at its conclusion.
also relied upon The Member, Board of
Revenue v. Arthur Paul Benthall, 1955 SCR 84 in arriving at its conclusion.
Implications
This decision is
likely to have widespread impact not just in syndicated loan transactions, but
also in other types of transactions that involve common documentation. For
example, if there is a sale and purchase of assets (say shares of a company)
between one or more sellers in favour of a single buyer under a common sale and
purchase agreement, the document may be treated differently for each of the
separate sellers in respect of the specific assets they are selling. This may
not matter much while computing stamp duty on an ad valorem basis, but it
becomes determinative when stamp duty is based on either a fixed amount on the document
or an ad valorem amount with a cap.
likely to have widespread impact not just in syndicated loan transactions, but
also in other types of transactions that involve common documentation. For
example, if there is a sale and purchase of assets (say shares of a company)
between one or more sellers in favour of a single buyer under a common sale and
purchase agreement, the document may be treated differently for each of the
separate sellers in respect of the specific assets they are selling. This may
not matter much while computing stamp duty on an ad valorem basis, but it
becomes determinative when stamp duty is based on either a fixed amount on the document
or an ad valorem amount with a cap.
The other
implication is the extent to which the court has considered surrounding circumstances
and not merely the document in question. For example, the syndicated lending arrangement
was considered as a whole in interpreting the scope of the mortgage. This
expands the considerations that may arise while computing stamp duty, and the
ability of the courts to look beyond the text of the document and into
surrounding circumstances will give rise to a great amount of uncertainty. Computation
of stamp duty (particularly on complex transactions) has never been
straightforward, and the approach followed in the present judgment may compound
matters further.
implication is the extent to which the court has considered surrounding circumstances
and not merely the document in question. For example, the syndicated lending arrangement
was considered as a whole in interpreting the scope of the mortgage. This
expands the considerations that may arise while computing stamp duty, and the
ability of the courts to look beyond the text of the document and into
surrounding circumstances will give rise to a great amount of uncertainty. Computation
of stamp duty (particularly on complex transactions) has never been
straightforward, and the approach followed in the present judgment may compound
matters further.
Although the court
did take into account the surrounding circumstances, adequate consideration
does not appear to be given the nature of a trustee. It is the case that the
trustee has legal title or interest in the mortgaged property (given this
involved an English mortgage). The relationship between the trustee and the
lenders is secondary in that the trustee must hold the property and act for the
benefit of the lenders. The Supreme Court paid scant regard to the specific
capacity in which the trustee holds the mortgage and treated it simply as a
pass-through, implying that it is acting as an agent of the lenders.
did take into account the surrounding circumstances, adequate consideration
does not appear to be given the nature of a trustee. It is the case that the
trustee has legal title or interest in the mortgaged property (given this
involved an English mortgage). The relationship between the trustee and the
lenders is secondary in that the trustee must hold the property and act for the
benefit of the lenders. The Supreme Court paid scant regard to the specific
capacity in which the trustee holds the mortgage and treated it simply as a
pass-through, implying that it is acting as an agent of the lenders.
Finally, the
decision erodes the distinction between a “document” and a “transaction”. While
stamp duty can be levied only on the document, the ability of the courts to cut
through the documentation structure and explore surrounding circumstances through
an expansive interpretation of section 5 of the Gujarat Stamp Act (or similar
provisions) will likely turn the basic principles of the law of stamp duty on their
head.
decision erodes the distinction between a “document” and a “transaction”. While
stamp duty can be levied only on the document, the ability of the courts to cut
through the documentation structure and explore surrounding circumstances through
an expansive interpretation of section 5 of the Gujarat Stamp Act (or similar
provisions) will likely turn the basic principles of the law of stamp duty on their
head.
[1] Philip Wood, Law and Practice
of International Finance, University Edition (London, Sweet & Maxwell,
2008).
of International Finance, University Edition (London, Sweet & Maxwell,
2008).