Unlisted debentures aren't considered as marketable security and the issuer needn't pay stamp duty on them
In terms of the provisions of entry 91 of List I (Union List), only the Central Government has power to levy stamp duty on issue of debentures. The State Government can levy stamp duty only on transfer of debentures, not issue of debentures.
However, interestingly, some state stamp laws also provide entries pertaining to payment of duty on issue of debentures which are different from the stamp duty prescribed by the Central Government, which creates confusion among issuing companies. Since the Central Government is entitled to levy stamp duty, companies need pay the duty prescribed by the Central Government, and not that required under state laws.
In terms of order bearing S.O. 2189(E) dated September 12, 2008, issued by the Department of Revenue, Ministry of Finance, it is required that the issuer will pay the stamp duty on issue of debentures, being a marketable security transferable (a) by endorsement or by a separate instrument of transfer (b) by delivery; at the rate of .05% per year of the face value of the debentures, subject to the maximum of 0.25% or Rs 25 lakh, whichever is lower.
In terms of the provisions of this order, a company issuing debentures is required to pay stamp duty only if debentures are treated as “marketable security”. Hence, it is important to analyse the expression “marketable security”.
The expression, "marketable security" is defined under Section 2(16-A) of the Indian Stamp Act, 1899 to mean a security of such a description as to be capable of being sold in any stock market in India or in the United Kingdom.
As per this definition, the expressions (i) ‘security’; (ii) ‘as to be capable of being sold in any stock market in India or United Kingdom’; need to be interpretated and analysed to ascertain whether debentures of an unlisted company will be treated as “marketable security”.
The term ‘security’ as used in the aforesaid definition of ‘marketable security’ has not been defined in the Indian Stamp Act, therefore, reference of the same can be taken from Securities Contracts (Regulation) Act, 1956.
Sub-clause (i) of Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 defines the term ‘security’ as follows:
“Securities” include: (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;”
The Hon’ble Bombay High Court in Dahiben Umedbhai Patel And Others vs Norman James Hamilton And Others, held that:
“In our view, the words plainly read as incapable of any other meaning except that the Legislature made the definition of "securities" an inclusive one having regard to the object with which the Regulation Act was enacted, namely, to control transactions which were carried on in market, that is, the stock exchange. The securities referred to in the definition were clearly intended to have a character of marketability. It is no doubt true that what is saleable can also be marketable. But when you are dealing with a market where transactions in only a particular commodity are carried on, then the marketability of securities must be considered from that angle. It is needless to point out that a market contemplates an appointed place of buying and selling. Indeed, the Act itself refers to the power of the stock exchange to provide for opening and closing of markets and the regulation of the hours of trade as a matter on which a bye-law can be made by the stock exchange. The stock exchange, therefore, is contemplated as a market even under the Act.”
In view of the aforesaid judgement, it can be inferred that unlisted debentures issued by a company will not be considered as ‘security’ under SCRA. However, the Hon’ble Supreme Court of India in Naresh K. Aggarwala and Co. vs Canbank Financial Services Ltd. and Anr. has take a contrary view and held that the definition of ‘security’ does not distinguish between the listed and unlisted securities. The relevant texts of the judgement are as follows:
“Perusal of the above quoted definition shows that it does not make any distinction between listed and unlisted securities and therefore it is clear that the Circular will apply to the securities which are not listed on the Stock Exchange.....”
In view of the aforesaid Supreme Court judgement, listed as well as unlisted debentures will be considered as ‘security’ as per the definition provided under the SCRA.
In order to fall within the definition of ‘marketable security’ as mentioned in the Indian Stamp Act; it must also be capable of being sold in any stock market in India or in the United Kingdom. In this regard, it is pertinent to note the definition of ‘marketable security’ refers to ‘stock market’ which can only be a stock exchange in India, where, such security can be purchased and sold by the parties in open market. Hence, the debentures will be deemed to be ‘capable of being sold in any stock market in India’ only if such debentures are being listed on the floor of a stock exchange. Had that not been the intention of the legislature, the words ‘stock market’ must have not been specified in the definition of ‘marketable security’ and consequently, all the companies (whether private company or public company) will be required to pay the prescribed stamp duty irrespective of the fact whether they intend to get the debentures listed or not. It seems that the legislature intends to distinguish between the listed debentures and unlisted debentures, therefore, it has advertently inserted the words ‘stock market’ in the definition of ‘marketable security’. The aforesaid position is also reiterated by the Hon’ble Madras High Court in The Chief Controlling Revenue Authority (Stamp Act) vs Kamala Sugar Mills Limited, in which the Hon’ble High Court held that:
“Admittedly, on the facts of the case, the document in question is not a marketable security as it is not listed in the stock exchange to be sold in the stock market in India or in the United Kingdom and it is not capable of being sold in the stock market either by endorsement or by transfer or by delivery……………... In other words, it is not possible to effect the transfer of the document by endorsement or by delivery in favour of a third party as there exists a mortgage over the immovable properties mentioned in the deed. In other words, the transfer of document in question cannot be effected either by endorsement or by delivery unless certain further acts are also, done to transfer the security in favour of the assignee or the subsequent mortgagee.”
In view of the above, we can infer that unlisted debentures will not be considered as marketable security and the issuer needn’t pay stamp duty on them.
The author is Senior Associate, Seth Dua & Associates, Solicitors and Advocates. Views expressed are personal
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