Thursday, August 13, 2015

Stamp Duty on Mortgages in Syndicated Lending Transactions


Syndicated loans are quite common in lending transactions. In large loans, a single bank may not be in a position to provide the loan by itself. Hence, the loan is syndicated such that “two or more banks agree to make loans to a borrower on common terms governed by a single agreement between all parties.”[1] Similarly, a common security trustee is appointed to receive and hold the security provided by the borrower, which is held for the benefit of the common lenders.

The issue of stamp duty on the mortgage provided by a borrower to a security trustee for the benefit of syndicated lenders came up before the Supreme Court in Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd. Specifically, the question was whether a single mortgage executed in favour of the security trustee for the benefit of several syndicated lenders would be treated as a single document or as multiple documents (equivalent to the number of syndicated lenders). The Supreme Court concluded that the agreement ought to be construed separately for each syndicated lender and stamped as such (i.e. multiple documents).

Facts and Decision

The borrower, Coastal Gujarat Power Limited, required finance to set up a power project. Thirteen lenders, who were banks and financial institutions, formed a consortium to undertake the lending. They executed a security trustee agreement appointing State Bank of India as the security trustee. The borrower executed an “Indenture of Mortgage for Delayed After Assets Deed” with the security trustee, and paid stamp duty of Rs. 4,21,000 on the document. This was disputed by the revenue authorities who demanded a total sum of Rs. 54,62,000 on the document. The dispute landed before a Full Bench of the Gujarat High Court, which opined that the State of Gujarat is not entitled to recover any additional stamp duty, and that “stamp duty is payable on instruments and not on transactions”. The High Court found that there was only one instrument creating the mortgage and that the relationship between the borrower and security trustee is independent of the relationship between the borrower and the lending banks. It was also categorical that the single mortgage deed cannot be treated as a combination of thirteen lenders.

The Gujarat revenue authorities appealed against this decision to the Supreme Court, which analysed the documentation structure and found (at para. 28) that “it is manifest that the instrument of mortgage came into existence only after separate loan agreements were executed by the borrower with the lenders with regard to separate loan advanced by those lenders to the respondent borrowers”. The principal question therefore relates to the stamp duty payable where several matters (or transactions) are contained in a single instrument. This was tested against the provisions of section 5 of the Gujarat Stamp Act (the “Act”), which is extracted below:

Section 5 – 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.

Based on a reading of this and related provisions (sections 4 and 6 of the Act), the Supreme Court held:

31. From bare reading of these provisions, it is clear that … Section 5 deals only with the instrument which comprises more than one transaction and it is immaterial for the purpose whether those transactions are of the same category or of different categories.

32. It appears from the trustee document that altogether 13 banks lent money to the mortgagor, details of which have been described in the schedule and for the repayment of money, 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 falls under Section 5 of the Act.

The Supreme Court also relied upon The Member, Board of Revenue v. Arthur Paul Benthall, 1955 SCR 84 in arriving at its conclusion.


This decision is likely to have widespread impact not just in syndicated loan transactions, but also in other types of transactions that involve common documentation. For example, if there is a sale and purchase of assets (say shares of a company) between one or more sellers in favour of a single buyer under a common sale and purchase agreement, the document may be treated differently for each of the separate sellers in respect of the specific assets they are selling. This may not matter much while computing stamp duty on an ad valorem basis, but it becomes determinative when stamp duty is based on either a fixed amount on the document or an ad valorem amount with a cap.

The other implication is the extent to which the court has considered surrounding circumstances and not merely the document in question. For example, the syndicated lending arrangement was considered as a whole in interpreting the scope of the mortgage. This expands the considerations that may arise while computing stamp duty, and the ability of the courts to look beyond the text of the document and into surrounding circumstances will give rise to a great amount of uncertainty. Computation of stamp duty (particularly on complex transactions) has never been straightforward, and the approach followed in the present judgment may compound matters further.

Although the court did take into account the surrounding circumstances, adequate consideration does not appear to be given the nature of a trustee. It is the case that the trustee has legal title or interest in the mortgaged property (given this involved an English mortgage). The relationship between the trustee and the lenders is secondary in that the trustee must hold the property and act for the benefit of the lenders. The Supreme Court paid scant regard to the specific capacity in which the trustee holds the mortgage and treated it simply as a pass-through, implying that it is acting as an agent of the lenders.

Finally, the decision erodes the distinction between a “document” and a “transaction”. While stamp duty can be levied only on the document, the ability of the courts to cut through the documentation structure and explore surrounding circumstances through an expansive interpretation of section 5 of the Gujarat Stamp Act (or similar provisions) will likely turn the basic principles of the law of stamp duty on their head.

[1] Philip Wood, Law and Practice of International Finance, University Edition (London, Sweet & Maxwell, 2008).


Anonymous said...

Hi Umakanth,

The comment is unrelated. This seems to be an interesting problem on securities law:,%20NUALS%20-%20National%20Securities%20Law%20Moot%20Court%20Competition.pdf

Thought I'll bring it to the readers' attention.


Umakanth Varottil said...

I am posting below some observations/comments received via email from a reader Mr. Pulkit Sharma (with his consent) in three parts:

Dear Mr. Umakanth

I have had the opportunity to read in detail the judgment passed by the Hon’ble Supreme Court in the matter Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd. & Ors, and your brief analysis of the same on your blog post yesterday. I would also like to make a few observations on the said judgment.

You have summarized the facts and the decision of the Hon’ble Supreme Court in your post yesterday so I would not repeat the same for the purposes of this post, but refer to some relevant portions of the judgment wherever required.

Firstly, one of the arguments made by the Learned Counsel for the Chief Controlling Revenue Authority was that the entire structure of mortgage creation and executing a single mortgage document was with the sole purpose of evading stamp duty (refer para 14 of the said judgment). This contention, in my respectful submission, from what appears in the reported judgment, was not adequately countered, and it seems to have set the tone for eventual judgment of the Court. As also pointed out in your earlier blog post, appointment of security trustee is a usual industry practice in consortium financing because, first and foremost, it offers administrative and practical convenience. It is more convenient for the Borrower or the security provider in such loan/financing transactions to deal with one common entity (for receiving and sending notices, instructions, enforcement actions etc.) instead of trying to communicate with different lenders on the same point at the same time. Having one entity holding a common pool of security for an entire project on behalf of multiple lenders is just a more efficient way of doing business and avoiding delays and errors in communication.

Further, and what should have been explained in detail to the court, is that, being a trust structure (adequately legally srecognized under Indian law) with an identified entity acting as the trustee, all security created in favour of the trustee is a ‘trust property’ with all consortium lenders being beneficiaries of the trust. In addition to the aforesaid commercial and practical advantages offered, it also reduces the amount of documentation required when there is a substitution or addition of lenders on account of a downsell/transfer of loan by any of the consortium lenders (I will also deal later in the post with the fact that such downselling abilities have not been considered by the judgment at all). In such cases of downselling, a new lender is added to the consortium and also as a beneficiary of the existing trust (again against which there is no prohibition in Indian law), as a result of which the benefit of the security automatically extends to such new lenders without there being a need to re-create security (since the security is already held by the trust). A note of caution here that such downselling / transfer of the loan by the existing lenders should not be confused with re-financing or fresh additional borrowing by the borrowers as in such cases a fresh security creation to secure the fresh amounts borrowed is required.

These are some of the basic advantages offered by a trust structure. The fact that it should also result in stamp duty efficiency is an added bonus and not the sole reason for undertaking this structure. Also, just because one is able to save stamp duty by efficient and legally acceptable and recognized structuring of transactions is no ground to rule or contend that the stamp duty is being evaded – there are numerous cases on the point that effective tax planning is allowed and it does not amount to tax evasion.

- continued in the next part

Umakanth Varottil said...

- continued from the previous part

Secondly, arguments were made on the basis of applicability of Section 5 of the Bombay Stamp Act as applicable to Gujarat. Since the Hon’ble Court went beyond the instrument to look at the transaction and viewed it as different matters/transactions, it would be necessary to note that the core transaction was to avail financing for one ultra mega power project being undertaken. That is the matter or transaction in question. Simply because the funding is availed from one lender or multiple lenders or because security is created in favour of one entity on behalf of such lenders does not in my respectful submission make it multiple or distinct matters or transactions. The instrument presented for stamping deals with one such matter i.e. mortgage over a specific property in favour of a security trustee. While the said Section 5 may (debatable even in those cases) be applicable in other scenarios involving consortium financing where multiple projects are being funded (for instance in cases of multiple real estate projects being developed by a developer through a common consortium of lenders involving separate trusts) or any other scenarios which may be identified in various discussions on this topic, but to make the stamp duty applicable over a mortgage deed by accounting for the number of lenders involved when there is a specific Article in the stamp Act which provides for a cap on the duty payable irrespective of the amounts or parties involved seems to be inconsistent with the intent of the relevant stamping provision.

When the stamp duty is fixed at a certain amount for a mortgage deed, whether Rs. 100 crores or Rs. 1000 crores are secured through such mortgage, or whether such amounts are borrowed from one lender or multiple lenders, should not form relevant consideration especially in project financing transactions where only a single matter and transaction is involved.

Thirdly, an analogy may be drawn to Section 281 of the Income Tax Act, 1961. It is a usual condition precedent in financing transactions in India involving security creation, that prior to any security being created a permission of the Income Tax Officer should be obtained. Section 281 provides that (emphasis added) –

"Section 281

(1) Where, during the pendency of any proceedings under this Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise:
Provided that such charge or transfer shall not be void if it is made -
(i) For adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee; or

(ii) With the previous permission of the Assessing Officer.
(2) This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds five thousand rupees and the assets charged or transferred exceed ten thousand rupees in value.

Explanation : In this section, "assets" means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee."

- continued in the next part

Umakanth Varottil said...

- continued from the previous part

Even under this Section which contemplates prior permission for creating the charge “in favour of any other person”, the Income Tax Officers themselves give the said permission, even in financing transactions involving multiple lenders, only once for creating the charge in favour of the Security Trustee upto a specific amount and such permission is not given or even insisted by the tax authorities to be obtained for each lender separately on the grounds that this amounts to security creation for different persons and matters.

Lastly, while the judgment essentially lays down the law to the effect that a mortgage securing loans availed from different lenders would need to be stamped as if a different mortgage deed was created independently for each lender, this may not be practically enforceable or be possible to be followed in all situations.

For instance, and as mentioned above, in cases of down-sell or transfer of loans by a lender to other lenders.

To explain, lets consider the following scenario –

(a) A single lender agreed to lend an amount of Rs. 100 crores for a project, which for the purposes herein is assumed to be the entire debt component required for undertaking a particular project.
(b) The borrower settles a trust with a security trustee with the single lender as the sole beneficiary of the trust and creates a mortgage in favour of the security trustee for securing the amount of Rs. 100 crore.
(c) Full stamp duty as required under the law is paid on the mortgage deed for securing Rs. 100 crores.
(d) Once this process is over, stamp duty is paid and the mortgage deed is registered with the sub-registrar, the single lender downsells the Rs. 100 crore commitment to other lenders and such lenders are added as beneficiary to the trustee settled with the security trustee.

In such a scenario, since there is no increase in the amount secured by the mortgage deed (Rs. 100 crores), the said mortgage in favour of the security trustee would continue and there will be no fresh security creation required. The new lenders would get the benefit of the security by being added as beneficiaries of the trust which holds the secured property and the security trustee would act for the benefit of such additional lenders also.

Since there is no additional mortgage deed to be executed, there is no occasion or document to levy additional stamping for additional mortgage on.

It may be noted that this proposition clearly has the same effect of ‘multiple lenders providing loans to the borrower with a single mortgage deed creating security for such multiple lenders’ but not resulting in additional stamping based on the number of lenders involved.

It may not be possible to give the intended effect of the judgment to such scenarios and further structures can be worked out to ensure stamp duty efficiencies in commercial transactions.

Pulkit Sharma
Advocate, Bombay High Court

- concluded

Unknown said...

I agree with Advocate Pulkit Sharma's observations. The SC judgment can be looked as a hindrance to transaction structuring. It is not only a market practice but also logical to spread the risk of the loan to various banks when the loan amount is huge. No bank will take an exposure beyond certain amount. Accordingly it is imperative for a borrower to approach a consortium of lenders to have the debt side of the project being funded. Clearly these transactions cannot be said to be distinct matters for which separate stamp duty must be paid.

Renganath said...

S. 5 of the Guj. Stamp Act speaks of "several distinct matters" - i.e. there should be several matters AND those matters should be distinct. In the instant case, even assuming there are SEVERAL matters ((notwithstanding the fact, as it appears from your post, that the security was to be held in common for the 13 lenders), those are several similar maters and not several DISTINCT matters.

Mandar said...

Hello Sir,

In my humble view, the Supreme Court's thinking here is contrary to the principles pushing Vodafone.

Anonymous said...

I agree with the views of Advocate Pulkit Sharma as well as Mr. Umakanth. The concept of a trust being settled here has been completely overlooked.

Unknown said...

Argument before the hon Supreme Court should be like that :
When we propose the credit facilities under consortium that limit are assessed a uniform. All lender share the portion of fund from that.
Assets are common in the matter , client is one. So when single approach to loan is taken than where is multiple transaction.
The assets must be charged under one only.
Lender have their limit to take exposure for loan than and amount of loan is shared among them according to exposure taken by a particular bank.

a. d. nerurkar said...

It is learnt that Madras company has gone into review petition. Is that a fact?
a.d. M 9821405979

anant d. nerurkar said...

supreme court dismissed review petition also.Now companies should find some other way to get the finance. The pracice has come to an end.I filed a PIL in mumbai high court (PIL/93/2015) as in my opinion supreme court verdict is not applicable to Maharashtra. I reqest banks/ finanacial Institutes and Industries (through their
Associatios) to join, as high court may hear our plea to-gether and we shall get justice. a. d. nerurkar Mobile 9821405979.