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Introduction
Mergers and acquisitions are appearances of pivotal development and are basic device of business strategy. They are utilized as instruments to get to the market through a set up brand, to get piece of the pie, to kill rivalry, to decrease charge liabilities, to obtain skill or to set off gathered misfortunes of one element against the benefits of the other entity. Every plan of rebuilding an organization requires endorsement from the National Company Law Tribunal (NCLT). Numerous states in India demand Stamp Duty on requests of the court affirming the merger plot. This has made the bulky and court driven procedure of merger and procurement increasingly costly. The article will deal in detail the amendments made to Indian Stamp Act and its impact on merger & acquisition.
Statutory provisions
Stamp Duty is the topic purview of both the Centre and the State falling under Entry 91 of Union List and Entry 63 of State List in the Schedule VII separately. Therefore, a portion of the States in India have established their own Stamp Acts while others have embraced the Indian Stamp Act, 1899 with their particular state corrections. This has brought about irregularity in stamp obligation systems of various states hindering the procedure of mergers and acquisitions.
A merger or amalgamation between two companies had to be earlier sanctioned by a high court under the Companies Act, 1956 and is now to be approved by the National Company Law Tribunal (NCLT) under the Companies Act, 2013. In 1993, the State of Maharashtra amended the Bombay Stamp Act, 1958 to include an order of high court under section 349 of the Companies Act, 1956 in the definition of “conveyance” and for the first time, these orders became liable to stamp duty. This was challenged before the Supreme Court unsuccessfully in Hindustan Lever Ltd. v. State of Maharashtra (2004) 9 SCC 438.[1]
Meaning of Stamp duties
Stamp duties are taxes on transactions in the shape of stamps on instruments about them. That is to say, it is a type of tax levied by the government on instruments. It lends authenticity and evidentiary value to the document/instrument and it can thus be submitted in the court of law.[2]
Meaning of Merger, Acquisition and Amalgamation
Merger
The term “merger” can be defined as when two companies combine together with the objective of carrying out the business of one company. This can be understood with the help of an example. Suppose there are two companies, Company A and Company B. Company B becomes weak in operations as compared to Company A. in this situation, decision of merging of both the companies took place. Now, Company B gets merged with Company A and start discharging the business functions that has been carried out by Company A. The only condition that should be fulfilled while doing merger of two entities is that always the weak entity will get merged in the one which is stronger in position as compared to weak entity.
The business functions will be carried out of that entity in which the weaker company gets merged. The purpose of such merger to take place is to secure the interest of weak entity by reviving it with merging with such company who also carries the same kind of business.
Acquisition
Term “acquisition” can be defined as when one company takes over the business of another company. This can be better understood with the help of an example. Suppose there are two companies naming Company X and Company Y. Now, Company X is unable to discharge its functions and loss is incurring day by day. In such case, the Company Y takes over Company X. here taking over is used as synonym of acquire. When the acquisition of a company takes place, the acquiring company gets the right of management of such company which is acquired.
The shares of the company are being purchased by the acquiring company hence resulting in establishment of the full rights over the management of that company. The business functions of the acquiring company are discharged in such cases.
Amalgamation
The third term “amalgamation” can be defined as when two entities join together to form a new entity. Again, example is to be referred to understand this procedure. Suppose there are two companies, Company A and Company B. Both the companies join together and form a new company i.e., Company C. now there are three companies in existence, Company A, Company B and Company C. The functions carried out by the new company formed will be different from the functions carried out by the existing two companies.
Differences between merger, acquisition, and amalgamation
There is minor difference between all the three kinds of corporate restructuring. In case of merging of the company’s mutual consent of the company is there. The companies mutually agree and combine together to carry out the functions of one company. Whereas in case of, acquisition of company, one company acquire the management of the other company by purchasing the shares of the same and then such company which is acquired by the other company will have to discharge the functions of the acquiring company. No mutual consent of the companies will be there in such case.
On the other hand, amalgamation is different from the above two procedure. Under amalgamation of the two or more companies, a new company is formed which will be established with the objective of carrying out such business functions which are not carried out by the existing companies. The management of the newly formed company will be managed half by the existing companies.
Amendments Made to the Stamp Duty Act
The alterations are expected to encourage simplicity of working together and acquire consistency in stamp obligation instalments on issue and move of protections and have acquainted considerable changes with the past stamp obligation system. The revisions relate not exclusively to the paces of stamp obligation yet in addition to the way toward requiring and gathering stamp obligation. The stamp obligation system has experienced a key change since the available occasion has moved from ‘execution of an instrument recorded in the calendar’ to a ‘corporate activity relating to an exchange’. This change in outlook might be exposed to legal investigation for inspecting its sacred legitimacy.
Comparison of Old Stamp Act with the Amended Provision of the Act
Below is the comparison in the tabular format regarding the amendments that took place in stamp duty act and the impact of the same on the procedure of merger and acquisition of the company.
1. Comparative Analysis with Regard to the Revision of the Rates.[3]
| Nature of Transaction | New Stamp Duty Rates (applicable with effect from 1 July 2020) | Stamp Duty Rates applicable prior to 1 July 2020* |
| Issue of securities (other than debentures) through a stock exchange, depositories or otherwise | 0.005% | 0.1% |
| Issue of debentures through a stock exchange, depositories or otherwise | 0.005%# | 0.05% per year of the face value of the debenture, subject to the maximum of 0.25% or INR 25,00,000 (Indian Rupees Twenty-Five Lakhs) whichever is lower |
| Transfer of securities (other than debentures) in dematerialised form | 0.015% (transfer on delivery basis) 0.003% (transfer on non-delivery basis) | NIL |
| Transfer of securities (other than debentures) in physical form | 0.25% | |
| Transfer of debentures | 0.0001% | 0.05% per year of the face value of the debenture, subject to the maximum of 0.25% or INR 25,00,000 (Indian Rupees Twenty-Five Lakhs) whichever is lower. |
The amendment to the Act made changes in the application of rates under stamp duty. Earlier on the issuance of the securities the rate applied was 0.1% now the same has been lowered down to 0.005%. Similarly, the rates implied for the issuance of debentures are also reduced under the amendment made in the new Stamp Act. However, certain amount was also increased in order to discharge the functions with respect to the mergers and acquisitions of the company.
2. Calculation of Stamp Duty for the Onus of Payment and Amount for the Same. [4]
| Nature of the Transaction | Duty Payer | Duty Payable On (as per the prescribed rates stated above) |
| Issue of securities which results in creation or change in records of the depository | Issuer | Total market value of the securities mentioned in the allotment list |
| Issue of securities otherwise than through a stock exchange or depository | Issuer | Total market value of the securities |
| Sale of listed securities through the stock exchange | Buyer | Price at which the securities are traded |
| Off market transfer of securities made through a depository | Transferor | Consideration amount mentioned on the delivery instruction slips |
| Transfer of securities otherwise than through a stock exchange/ depository | Transferor | Consideration amount mentioned in the share transfer form |
This amendment made clear as to whom is obliged to pay the amount under stamp duty Act. The circumstances under which such duty is to be paid is also clarified in the amended act. The rates on which such duty is to be paid is also mentioned above. Hence, clarification is made so as to reduce the confusion regarding the payment of the duty amount in case of mergers or acquisition or amalgamation of the company takes place.
- Changes in Definitions with Respect to Onus of Payment and Amount of Stamp Duty.[5]
| Term | Details |
| Instruments | The definition of ‘instruments’ has been widened to include in its ambit ‘a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded.’ |
| Securities | The definition of the ‘securities’ has been widened to include certificate of deposit, commercial usance bill, commercial paper, repo on corporate bonds and such other debt instrument of original or initial maturity up to one year. Given the nature of financial liability, this appears to be clarificatory in nature. |
| Debentures | The amendment has introduced an inclusive definition of debentures. The following falls within the ambit of ‘debentures’, (i) debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not; (ii) bonds in the nature of debentures; (iii) certificate of deposit, commercial usance bill, commercial paper and such other debt instrument RBI may specify; (iv) securitised debt instruments; and (v) any other debt instruments specified by SEBI. |
| Market Value | The definition of market value has been introduced to mean, in relation to an instrument through which (i) any security is traded in a stock exchange, the price at which it is so traded; and (ii)any security which is transferred through a depository but not traded in the stock exchange, the price or the consideration mentioned in such instrument. |
4. No exclusion for move of protections in dematerialized structure
Preceding the change, by temperance of Section 8A of the Act, stamp obligation was not payable on the exchange of offers in dematerialized structure. This made exchange of offers in the dematerialized structure an appealing recommendation because of decreased expenses. Be that as it may, Section 8A of the Act has now been revised and stamp obligation exception accessible for move of offers in dematerialized structure has been discarded.
5. Assortment of Stamp Duty
The correction has acquainted a few changes with the procedure of assortment of stamp obligation if there should arise an occurrence of issuance, move or offer of protections through stock trade or safes. If there should be an occurrence of, deal or move of protections on the stock trade, stamp obligation will be gathered by the stock trades or clearing companies; and if there should be an occurrence of off market move of offers through the stores or issuance of protections which brings about creation or changes in the records of the storehouse, stamp obligation will be gathered by the vault.
Conclusion
The amendments have brought a uniform device for series and charge of stamp responsibility on the difficulty and switch of securities. These modifications will really deliver affordability withinside the stamp responsibility as a minimum in a few states and are possibly to keep away from exercise of selecting states in which the stamp responsibility prices are lower. This rationalized and harmonized device via centralized series mechanism is anticipated to make certain minimization of price of series and better sales series.
References:
[1] www.thehindu.com/business/stamp-duty-on-merger-an-illegal-circular/article25649296.ece
[2] www.lawteacher.net
[3] www.mondaq.com/india/securities/964050/amendments-to-the-indian-stamp-act–an-overview-of-key-changes-impacting-merger-and-acquisitions
[4] Ibid.
[5] Ibid.
