Hike in Stamp Duty on Syndicate Loan Financing

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Hike in Stamp Duty on Syndicate Loan Financing
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• Introduction
• 1. Financing of infrastructure projects by means
  of syndicate loan arrangements is a common
  practice. Syndicate financing refers to a
  practice wherein a loan is sanctioned to a single
  borrower jointly by a group of lenders generally
  on the same terms. These lenders are usually
  banks, but they can also include other financial
  institutions. One amongst all these lenders is
  designated as the lead lender who provides
  probable participants with a memorandum including
  borrower specific information. The lead lender
  also acts as the security trustee on behalf of
  all other lenders, therefore, it holds the
  mortgaged property for and on behalf of all other
  lenders.
• Stamp Duty is a type of government tax which is
  attracted on every instrument in form of a
  document by which any rights or liabilities are
  to be created, transferred, limited, extended,
  extinguished or recorded. A mortgage deed for the
  purpose of the Stamp Act is an instrument, hence,
  applicable, stamp duty is applicable. Therefore,
  in the syndicate loan financing model the single
  mortgage deed executed between the borrower and
  the security trustee (lead lender) would be
  constituted as an instrument, hence, amenable to
  stamp duty. Whether such instrument would
  constitute to encompass only one transaction or
  whether such instrument shall encompass to
  include multiple transactions with all other
  lender banks was the question raised before the
  Supreme Court.

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• Facts of the Case
• 2. In the present case of Chief Controlling
  Revenue Authority v. Coastal Gujarat Power
  Ltd.C.A. No. 6054 of 2015, dated 11-8-2015 the
  respondent Coastal Gujarat Power Ltd. ("CGPL")
  needed financial assistance for setting-up an
  ultra-mega power project in the area of
  Kutch-Bhuj. For that purpose it secured
  assistance from a few lenders. The lenders, i.e.,
  financial institutions, which were thirteen in
  number, formed a consortium as a trust and
  executed a security trustee agreement
  ("STA") inter se appointing one banker, viz,. the
  SBI as the security trustee.
• CGPL had executed an 'Indenture of Mortgage for
  Delayed After Assets Deed' ("Mortgage Deed") with
  the SBI, mortgaging its assets as mentioned in
  the deed itself. The said document was presented
  for registration by paying stamp duty of Rs.
  4,21,000/- and the deed was registered. However,
  according to the Stamp Authority, CGPL was liable
  to pay Rs. 54,62,000/- as stamp duty on the said
  deed and, hence, demanded the balance amount of
  Rs. 50,41,000/- from CGPL.

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• 2.1 Applicable Law - For the purpose of this case
  the following provisions of the Stamp Act are
  relevant
• 2.1-1 Section 2(1) - Defines "instrument" to
  include every document by which any right or
  liability is, or purports to be created,
  transferred, limited, extended, extinguished or
  recorded but does not include a bill of exchange,
  cheque, promissory note, bill of lading, letter
  of credit policy of insurance, transfer of share,
  debenture, proxy and receipt.
• 2.1-2 Section 5 deals with - 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.
• 2.2 Gujarat High Court's Ruling in the case - The
  Gujarat High Court held that where a mortgage is
  created in favour of a security trustee (holding
  security in trust for multiple lenders) it should
  be treated as a single transaction (and not
  distinct transactions, as contented by the State)
  irrespective of the fact that such security
  trustee holds such mortgage for the benefit of
  multiple lenders. Consequently, the Court held
  that such a mortgage deed constitutes a single
  instrument relating to a single transaction and,
  therefore, would be charged with the duty payable
  for a single mortgage and not with an aggregate
  duty payable, as if there were multiple
  mortgages.
• In the Court's opinion the relationship between
  the borrower and the security trustee was
  independent of the relationship between the
  borrower and the lenders. The Court held that the
  mortgage deed was a separate instrument, under
  which rights of a mortgagee were created only in
  favour of the security trustee. As a result, no
  separate or distinct transactions were created
  under the mortgage deed, either by way of legal
  fiction or otherwise.

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• Further, the Court held that on a plain reading
  of the provisions of the Act, section 5 of the
  Gujarat Stamp Act does not empower the State to
  charge revenue on an entire transaction as
  contemplated outside the scope of the instrument
  in question. Like all fiscal statutes, stamp duty
  laws should be interpreted strictly on an
  unambiguous reading of the provisions of the law
  and not on the basis of the State's understanding
  of the intention of the Legislature.
• 2.3 Supreme Court's Ruling in the case - The
  Supreme Court, reversing the order of the Gujarat
  High Court, held that the instrument of mortgage
  came into existence only after separate loan
  agreements were executed by CGPL with the lenders
  with regard to separate loan advanced by those
  lenders to CGPL. It held that under the mortgage
  deed the property was mortgaged with the security
  trustee for and on behalf of lender banks only.
  On interpretation of section 5 of the Stamp Act
  it held that section 5 deals with instruments
  which comprise more than one transaction and it
  is immaterial for the purpose whether those
  transactions are of the same category or of
  different categories.
• Further, after scrutinizing the entire security
  trustee agreement in detail it held that 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 fall
  under section 5 of the Act.
• In the end it stated that the High Court has
  committed serious error of law in interpreting
  the provisions of sections 5 and 6 of the Act.
  Consequently, the answer given by the High Court
  on the Reference cannot be sustained in Law.

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• Conclusion
• 3. The present ruling would have wide
  implications on the banking finance field. The
  direct impact of the present ruling is that the
  cost of capital for infrastructure companies
  which heavily relies on syndicate finance would
  increase substantially. To put it in a better
  perspective, let us take example of the present
  case itself, wherein CGPL before this ruling was
  amenable to pay only Rs. 4,21,000/-, however,
  because of this ruling it will have to pay a
  total stamp duty of Rs. 54,62,600/-.
• Apart from this, the present case will also have
  allied implications on transactions wherein a
  single 'instrument' is used to cover several
  aspects of an entire transaction like that of an
  business transfer wherein there is transfer of
  shares and assets. The present ruling would give
  teeth to relevant State stamp authorities having
  similar provision like that of the Gujarat Stamp
  Act that to demand stamp duty for both share
  transfer and asset transfer.
• Apart from this the present case shall give teeth
  to the stamp revenue authorities to send stamp
  duty notices to assessees seeking for payment of
  stamp-duty on transaction basis rather than on
  instrument basis, which otherwise has been the
  basic jurisprudence of the Stamp Act.

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