The implication of Stamp Duty on Scheme of Arrangement (Merger & Amalgamation):

The Scheme of Arrangement is a legal mechanism under corporate law that allows companies to restructure their capital, assets, or business operations. This can involve mergers, demergers, amalgamations, and other forms of corporate restructuring. One of the critical considerations in the execution of a Scheme of Arrangement is the implication of stamp duty, which is a tax levied on legal documents by the government.

The implication of Stamp Duty on Scheme of Arrangement (Merger & Amalgamation)

Understanding Stamp Duty:

Stamp duty is a form of tax that is required to be paid on certain legal documents, including those related to the transfer of assets or the amalgamation of companies. The duty is typically a percentage of the transaction value or market value of the property being transferred. It serves as a source of revenue for the government and ensures the legality of the document.

Applicability of Stamp Duty on Scheme of Arrangement:

The implication of stamp duty on a Scheme of Arrangement can vary based on several factors, including the nature of the transaction, the jurisdiction in which the transaction takes place, and the specific laws governing stamp duty in that jurisdiction. Here are some key points to consider:

1. Nature of the Transaction:

Mergers and Amalgamations: In cases of mergers and amalgamations, stamp duty is typically payable on the transfer of assets and liabilities from one company to another. The duty is calculated based on the market value of the assets being transferred.
Demerger: In a demerger, where a part of a company is transferred to a new entity, stamp duty is levied on the value of the assets transferred to the resulting company.
Reduction of Share Capital: When a company reduces its share capital as part of a Scheme of Arrangement, stamp duty may be payable on the order of the NCLT sanctioning the reduction.

2. Valuation for Stamp Duty:

The valuation of assets for the purpose of stamp duty can be complex and may require professional valuation services. Factors considered in valuation include the market value of the assets, the consideration paid, and any other relevant financial metrics.

3. Exemptions and Reliefs:

Certain jurisdictions may offer exemptions or reliefs from stamp duty for specific types of restructuring activities. For instance, some states in India provide stamp duty exemptions for schemes sanctioned by the National Company Law Tribunal (NCLT). Companies must carefully evaluate the availability of such exemptions and ensure compliance with the necessary conditions.

Compliance and Documentation:

Compliance with stamp duty regulations is crucial to ensure the legality of the Scheme of Arrangement. Key steps include:

Assessment of Stamp Duty: Accurately assessing the stamp duty payable on the transaction based on the applicable laws and valuation of assets.
Timely Payment: Ensuring timely payment of stamp duty to avoid penalties and interest.
Documenting Transactions: Properly documenting the transaction, including obtaining the necessary court orders and approvals, and affixing the stamp duty on the relevant legal documents.

Implications of Non-Compliance:

Failure to comply with stamp duty requirements can have serious implications, including:

Penalties and Interest: Non-payment or underpayment of stamp duty can result in hefty penalties and interest charges.
Legal Validity: Documents that are not duly stamped may be considered inadmissible in court and can affect the legal validity of the Scheme of Arrangement.
Operational Delays: Non-compliance can lead to delays in the execution of the Scheme of Arrangement, affecting business operations and strategic goals.

Rate of Stamp Duty

The rate of Stamp Duty on mergers and amalgamations varies from state to state. Some states have expanded the definition of conveyance to include transactions under Section 230-232 of the Companies Act, 2013, and have provided specific entry regarding the rate of stamp duty for the order of the NCLT sanctioning a Scheme of Arrangement. The table below provides specific rates of stamp duty on amalgamation for certain states:

STATE

RATE OF STAMP DUTY

ANDHRA PRADESH

INR 2/- for every INR 100/- or part thereof of the market value (MV) of the property.

CHHATTISGAR

7.5% of the MV of the immovable property transferred located within Chhattisgarh
Or
0.7% of aggregate of MV of shares issued or allotted and consideration paid,

whichever is higher.

MADHYA PRADESH

5% of the MV of the immovable property transferred located within Madhya Pradesh
Or
0.5% of aggregate MV of shares issued or allotted and consideration paid

whichever is higher.

STATE

RATE OF STAMP DUTY

GUJARAT

1% of the aggregate of MV of share issued or allotted OR face value of such shares, whichever is higher AND the consideration paid for such amalgamation,
or
1% of MV of immovable property situated in Gujarat of the transferor Company.

whichever is higher.

(Maximum duty INR 25 Crore)

KARNATAKA

Amalgamation:

3% on MV of the property of the transferor company, located within Karnataka; or
1% of aggregate value of shares issued or allotted and in case of a subsidiary company, shares merged (or cancelled) with parent company and consideration paid;

whichever is higher.

Reconstruction or Demerger:

3% on MV of the property of the transferor company, located within Karnataka;. or
1% of the aggregate value of shares issued or allotted and consideration paid;

whichever is higher.

KERALA

2% of the MV of the immovable property of the transferor company Or
0.6% of aggregate MV of shares or marketable securities, issued or allotted, and amount of consideration paid

whichever is higher.

MAHARASHTRA

10% of the market value (MV) of the shares issued or allotted and consideration paid for such amalgamation-
Provided amount of duty shall not exceed-

5% of the MV of the immovable property located within Maharashtra of the Transferor Company; or
5% of the MV of shares issued or allotted and consideration paid, whichever is higher:

Provided that in case of reconstruction or demerger the duty shall not exceed-

1. 5% of the MV of the immovable property located

within Maharashtra transferred by Demerging Company to the Resulting Company, or

2. 0.7% of the MV of shares issued or allotted to the Resulting Company and the amount of the consideration paid, whichever is higher.

RAJASTHAN

4% of aggregate MV of share issued or allotted or cancelled, or face value of shares, whichever is higher , and consideration paid

or
4% of the MV of the immovable property situated in Rajasthan of the transferor company,

whichever is higher.

TELANGANA

INR 2/- for every INR 100/- or part thereof of the market value (MV) of the property.

WEST BENGAL

The same duty as a Conveyance on the aggregate of MV of the shares issued or allotted, and consideration paid –

by the transferee company, for such amalgamation or merger:

Provided that the amount of such duty chargeable shall not exceed–

i. 2% of the MV of the immovable property located within West Bengal of the transferor company, or

ii. 0.5% of the aggregate of MV of the shares issued or allotted and consideration paid,
whichever is higher.

2. by the resulting company, for such reconstruction or demerger:

Provided that the amount of such duty chargeable shall not exceed–

(i) 2% of the MV of the immovable property located within West Bengal of the transferor company, or

(ii) 0.5 of the aggregate MV of the shares issued or allotted, to the resulting company and the amount of consideration paid,
whichever is higher.

Conclusion

The implication of stamp duty on a Scheme of Arrangement is a critical aspect that companies must carefully consider during corporate restructuring. Understanding the applicable laws, accurately assessing the duty payable, and ensuring timely compliance are essential steps to avoid legal complications and financial penalties.