[The following post is contributed
by Vinod Kothari and Nidhi Bothra of Vinod Kothari & Co.
The authors may be reached at [email protected]
and [email protected]
respectively]
by Vinod Kothari and Nidhi Bothra of Vinod Kothari & Co.
The authors may be reached at [email protected]
and [email protected]
respectively]
Introduction
Assignment of actionable claims/
receivables is achieved by an instrument, and such an instrument requires stamp
duty. The United Kingdom (UK), Hong Kong, Malaysia and India are examples of
jurisdictions where assignment agreements are liable to stamp duty. Currently,
in India, stamp duty in case of assignment of actionable claims/ receivables is
significantly high. It is a State subject, and in several states the duty is ad valorem. Some states have over the
years provided specific exemption on stamp duty in case of assignment, or have
reduced the rates of stamp duty. Considering the volume of assignment
transactions undertaken, whether by asset reconstruction companies or by way of
securitization, the stamp duty levied becomes a significant cost in such
transactions.
receivables is achieved by an instrument, and such an instrument requires stamp
duty. The United Kingdom (UK), Hong Kong, Malaysia and India are examples of
jurisdictions where assignment agreements are liable to stamp duty. Currently,
in India, stamp duty in case of assignment of actionable claims/ receivables is
significantly high. It is a State subject, and in several states the duty is ad valorem. Some states have over the
years provided specific exemption on stamp duty in case of assignment, or have
reduced the rates of stamp duty. Considering the volume of assignment
transactions undertaken, whether by asset reconstruction companies or by way of
securitization, the stamp duty levied becomes a significant cost in such
transactions.
The Enforcement of Security Interest
and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016[1]
has introduced several amendments to the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act,
2002), Recovery of Debts due to Banks and Financial Institutions Act, 1993
(RDDBFI Act) and other incidental laws. One of the amendments pertains to stamp
duty exemption on agreement or other document for transfer or assignment of
rights or interest in financial assets of banks or financial institutions under
section 5 of the SARFAESI Act, 2002, in favor of any asset reconstruction
company (ARC).
and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016[1]
has introduced several amendments to the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act,
2002), Recovery of Debts due to Banks and Financial Institutions Act, 1993
(RDDBFI Act) and other incidental laws. One of the amendments pertains to stamp
duty exemption on agreement or other document for transfer or assignment of
rights or interest in financial assets of banks or financial institutions under
section 5 of the SARFAESI Act, 2002, in favor of any asset reconstruction
company (ARC).
The Exemption
The exemption from stamp duty is
achieved by the insertion of section 8F to the Indian Stamp Act, as provided in
the First Schedule to the Amending Act. The text of section 8F as inserted is
as follows:
achieved by the insertion of section 8F to the Indian Stamp Act, as provided in
the First Schedule to the Amending Act. The text of section 8F as inserted is
as follows:
8F. Notwithstanding anything contained
in this Act or any other law for the time being in force, any agreement or
other document for transfer or assignment of rights or interest in financial
assets of banks or financial institutions under section 5 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, in favour of any asset reconstruction company, as defined in clause
(ba) of sub-section (1) of section 2 of that Act, shall not be liable to duty
under this Act.
in this Act or any other law for the time being in force, any agreement or
other document for transfer or assignment of rights or interest in financial
assets of banks or financial institutions under section 5 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, in favour of any asset reconstruction company, as defined in clause
(ba) of sub-section (1) of section 2 of that Act, shall not be liable to duty
under this Act.
The proviso, as apparent from the Joint
Committee Report, was inserted with the intent of eliminating any scope for
misuse of the exemption, in case of acquisition for purposes other than asset
reconstruction or securitization.
Committee Report, was inserted with the intent of eliminating any scope for
misuse of the exemption, in case of acquisition for purposes other than asset
reconstruction or securitization.
Noted Issues on
the Exemption
the Exemption
Some points may be noted as regards the
stamp duty exemption:
stamp duty exemption:
1.
Most importantly, the draftsman seems to have omitted, possibly out of
inadvertence, to grant exemption to stamp duty payable under stamp laws other
than the Indian Stamp Act. It was quite easy for the draftsman to see the
language of the exemption granted by several of the preceding sections. For
example, the exemption granted under section 8E of the Indian Stamp Act,
inserted by the Banking Laws (Amendment) Act 2012, provides exemption, not just
to the stamp duty payable under the Indian Stamp Act, but also “under any other
law”, thereby exempting the duty payable under the stamp laws of the states
that have their own stamp laws:
Most importantly, the draftsman seems to have omitted, possibly out of
inadvertence, to grant exemption to stamp duty payable under stamp laws other
than the Indian Stamp Act. It was quite easy for the draftsman to see the
language of the exemption granted by several of the preceding sections. For
example, the exemption granted under section 8E of the Indian Stamp Act,
inserted by the Banking Laws (Amendment) Act 2012, provides exemption, not just
to the stamp duty payable under the Indian Stamp Act, but also “under any other
law”, thereby exempting the duty payable under the stamp laws of the states
that have their own stamp laws:
8E.
Notwithstanding anything contained in this Act or any other law for the time
being in force,-
Notwithstanding anything contained in this Act or any other law for the time
being in force,-
(a) conversion
of a branch of a bank into a wholly owned subsidiary of the bank or transfer of
shareholding of a bank to a holding company of the bank in terms of the scheme
or guidelines of the Reserve Bank of India shall not be liable to duty under
this Act or any other law for the time being in force; or
of a branch of a bank into a wholly owned subsidiary of the bank or transfer of
shareholding of a bank to a holding company of the bank in terms of the scheme
or guidelines of the Reserve Bank of India shall not be liable to duty under
this Act or any other law for the time being in force; or
(b) any
instrument, including an instrument of, or relating to, transfer of any
property, business, asset whether moveable or immoveable, contract, right, liability
and obligation, for the purpose of, or in connection with, the conversion of a
branch of a bank into a wholly owned subsidiary of the bank or transfer of
shareholding of a bank to a holding company of the bank in terms of the scheme
or guidelines issued by the Reserve Bank of India in this behalf, shall not be liable to duty under this Act
or any other law for the time being in force.
instrument, including an instrument of, or relating to, transfer of any
property, business, asset whether moveable or immoveable, contract, right, liability
and obligation, for the purpose of, or in connection with, the conversion of a
branch of a bank into a wholly owned subsidiary of the bank or transfer of
shareholding of a bank to a holding company of the bank in terms of the scheme
or guidelines issued by the Reserve Bank of India in this behalf, shall not be liable to duty under this Act
or any other law for the time being in force.
Similarly,
section 8D, inserted by the Factoring Regulation Act, provides exemption from
stamp duty, not only payable under the Indian Stamp Act, but also under any
other stamp law:
section 8D, inserted by the Factoring Regulation Act, provides exemption from
stamp duty, not only payable under the Indian Stamp Act, but also under any
other stamp law:
Agreement or
document for assignment of receivables not liable to stamp duty.
document for assignment of receivables not liable to stamp duty.
8D. Notwithstanding anything contained
in this Act or any other law for the time being in force, any agreement or
other document for assignment of “receivables” as defined in clause (p) of
section 2 of the Factoring Regulation Act, 2011 in favour of any “factor” as
defined in clause (i) of section 2 of the said Act shall not be liable to duty under this Act or any other law for the
time being in force.
in this Act or any other law for the time being in force, any agreement or
other document for assignment of “receivables” as defined in clause (p) of
section 2 of the Factoring Regulation Act, 2011 in favour of any “factor” as
defined in clause (i) of section 2 of the said Act shall not be liable to duty under this Act or any other law for the
time being in force.
The
2016 Amending Act could not be having the intent of exempting merely the stamp
duty payable under the Indian Stamp Act, as there several significant states,
notably Maharashtra and Gujarat, which have their own stamp laws. However, the
amendment stops by referring to stamp duty payable under the Indian Stamp Act
only.
2016 Amending Act could not be having the intent of exempting merely the stamp
duty payable under the Indian Stamp Act, as there several significant states,
notably Maharashtra and Gujarat, which have their own stamp laws. However, the
amendment stops by referring to stamp duty payable under the Indian Stamp Act
only.
2.
The exemption is limited only to financial assets, and not physical assets. For
example, when a loan or a portfolio of loans is transferred, there may be a
mortgagee’s interest in property getting transferred. The mortgagee’s interest
is covered by the definition of “financial asset” given in sec. 2(1)(l).
However, where there is an enforcement of security interest by the ARC, and
subsequently the mortgaged property is getting transferred from the ARC to a
buyer, there is no question of exemption on the conveyance of the said
property.
The exemption is limited only to financial assets, and not physical assets. For
example, when a loan or a portfolio of loans is transferred, there may be a
mortgagee’s interest in property getting transferred. The mortgagee’s interest
is covered by the definition of “financial asset” given in sec. 2(1)(l).
However, where there is an enforcement of security interest by the ARC, and
subsequently the mortgaged property is getting transferred from the ARC to a
buyer, there is no question of exemption on the conveyance of the said
property.
3.
One of the biggest sources of confusion will be whether the benefit of
exemption will be available where the ARC is acquiring the asset in its capacity
as a trustee. As is well-known, most of the assets acquired by ARCs are bought
in their capacity as a trustee of a trust, in which the assets are housed. The
trust is a special purpose vehicle. The ARC is simply the trustee of the trust.
The exempting section in the Stamp Act refers to transfer of financial assets
to an asset reconstruction company as defined in section 2(1)(ba). It is
possible to argue that what the ARC does in its own capacity, and what it does
in capacity as a trustee, are different, as the latter is covered specifically
by section 7(2A). On the other hand, it is possible to contend that the
business of reconstruction includes purchase of assets in a trust and the
issuance of security receipts against that, since the holding of the assets in
a trust is merely a way of ring-fencing the assets for the benefit of the
holders of the security receipts. While this confusion could have been avoided
by use of clear language, the authors’ view is that it will be impractical, and
contrary to the intent of the law to keep the exemption limited to acquisition
of assets on the balance of the ARC itself.
One of the biggest sources of confusion will be whether the benefit of
exemption will be available where the ARC is acquiring the asset in its capacity
as a trustee. As is well-known, most of the assets acquired by ARCs are bought
in their capacity as a trustee of a trust, in which the assets are housed. The
trust is a special purpose vehicle. The ARC is simply the trustee of the trust.
The exempting section in the Stamp Act refers to transfer of financial assets
to an asset reconstruction company as defined in section 2(1)(ba). It is
possible to argue that what the ARC does in its own capacity, and what it does
in capacity as a trustee, are different, as the latter is covered specifically
by section 7(2A). On the other hand, it is possible to contend that the
business of reconstruction includes purchase of assets in a trust and the
issuance of security receipts against that, since the holding of the assets in
a trust is merely a way of ring-fencing the assets for the benefit of the
holders of the security receipts. While this confusion could have been avoided
by use of clear language, the authors’ view is that it will be impractical, and
contrary to the intent of the law to keep the exemption limited to acquisition
of assets on the balance of the ARC itself.
4.
Also, the exemption is only for acquisition of “financial asset” by the ARC,
and not on disposal of financial assets by ARCs. Financial assets may be
transferred either by the ARC to a third party, or back to the transferring
bank (for example, in case of breach of representations or warranties). There
is no exemption in case of transfers by ARCs.
Also, the exemption is only for acquisition of “financial asset” by the ARC,
and not on disposal of financial assets by ARCs. Financial assets may be
transferred either by the ARC to a third party, or back to the transferring
bank (for example, in case of breach of representations or warranties). There
is no exemption in case of transfers by ARCs.
Stamp Duty
Exemption to Apply in Case of Securitization Transactions Too
Exemption to Apply in Case of Securitization Transactions Too
One notable feature of the exemption is
that the exemption is available in case of transfer of financial assets to an
ARC, either for the purpose of asset reconstruction, or for the purpose of
securitization. Currently, the marketplace for securitization seems to have
shunned the ARC option, though, the way the law was framed, the institution of
ARCs was envisaged as “securitization companies” and “reconstruction
companies”.
that the exemption is available in case of transfer of financial assets to an
ARC, either for the purpose of asset reconstruction, or for the purpose of
securitization. Currently, the marketplace for securitization seems to have
shunned the ARC option, though, the way the law was framed, the institution of
ARCs was envisaged as “securitization companies” and “reconstruction
companies”.
Stamp duty has been one of the biggest
pain points for securitization in India. In case of securitization of
mortgage-backed loans, there have often been curious legal opinions, limiting
the portfolio of home loans to certain states only.
pain points for securitization in India. In case of securitization of
mortgage-backed loans, there have often been curious legal opinions, limiting
the portfolio of home loans to certain states only.
Conclusion
Considering the growing burden of non-performing
assets (NPAs) in the country, the exemption has been introduced at the most
opportune time whereby it would reduce costs of transferring bad assets to
ARCs. While the intent of the exemption was to facilitate acquisition of
financial assets by ARCs, the limited scope of stamp duty exemption and the
lack of clarity in the language may render the exemption largely ineffective.
assets (NPAs) in the country, the exemption has been introduced at the most
opportune time whereby it would reduce costs of transferring bad assets to
ARCs. While the intent of the exemption was to facilitate acquisition of
financial assets by ARCs, the limited scope of stamp duty exemption and the
lack of clarity in the language may render the exemption largely ineffective.
Also, with a bit of thoughtful tweaking
of the guidelines of the Reserve Bank of India (RBI) pertaining to asset
reconstruction companies, it is possible to move to a scenario where the
purpose, with which ARCs were envisaged 14 years ago, may be achieved – that
is, to act as special purpose vehicles for securitization business as well, and
in the process, one of the bottlenecks for securitization business in India may
also get removed.
of the guidelines of the Reserve Bank of India (RBI) pertaining to asset
reconstruction companies, it is possible to move to a scenario where the
purpose, with which ARCs were envisaged 14 years ago, may be achieved – that
is, to act as special purpose vehicles for securitization business as well, and
in the process, one of the bottlenecks for securitization business in India may
also get removed.
– Vinod Kothari & Nidhi Bothra
[1] The Act received President’s assent
on 12 August 2016, enforcement notification has not been passed, the text of
the Act can be accessed here http://egazette.nic.in/WriteReadData/2016/171305.pdf
on 12 August 2016, enforcement notification has not been passed, the text of
the Act can be accessed here http://egazette.nic.in/WriteReadData/2016/171305.pdf
any assignment agreement prior to the amendment will also be not required to pay stamp duty?