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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
Customer
Care
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91-11- to encompass only one transaction or
instrument
would
constitute

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Facts of the Case

2.In the present case ofChief Controlling Revenue Authorityv.
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 seappointing 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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2.1Applicable Law -For the purpose of this case the following provisions of the Stamp Act are
relevant:
2.1-1Section 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.
2.1-2Section 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.
2.2Gujarat 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 asingle 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
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separate
instrument,
under which rights of a mortgagee were created only in favour of
the security

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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.
2.3Supreme 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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