STAMP DUTY ON SECURITIES TRANSACTION

The Government of India has recently amended the Indian Stamp Act 1899 (Act) to include stamp duty on (a) Issue; (b) Sale; and (c) Transfer of securities regardless of the whether such transactions are delivery-based or otherwise, or whether they take place through a stock exchange and depository or otherwise. This amendment to the Act have been brought into force from 1 July 2020.The Government has also notified necessary Rules which lay down rules regarding collection of stamp duty by the collection centre or the depository. This update analyses the said amendment and the Rules thereunder.

Amendment to section 8A of the Act: Section 8A of the Act has been amended by the Finance Act 2019 (Finance Act 2019). Earlier, the Act exempted the transfer of securities in dematerialised form from the liability of stamp duty under Section 8A of the Act. However, as per the amendment brought in by the Finance Act 2019,Section 8A now only exempts the following transfers:

• Transfer of registered ownership of securities from a person to a depository i.e., conversion of physical or materialized securities to dematerialized securities;

• Transfer from a depository to a beneficial owner i.e., conversion of dematerialized securities to physical or materialized securities.

Insertion of sections 9A and 9B to the Act: The Finance Act2019has inserted two new sections to the Act i.e., sections 9A and 9B. Sections 9A and 9B now impose liability of stamp duty on the issue, sale and transfer of securities. As per the said sections the transfer of securities will attract stamp duty regardless of whether such transactions are delivery based or otherwise, or whether they take place through a stock exchange and depository or otherwise.

Amendment to section 29 of the Act: Section 29 of the Act has been amended by the Finance Act2019 which deals with the responsibility of the relevant party to bear the payment of stamp duty. As per the amendment to the said section read with the Rules, the issue of securities on the stock exchange will attract stamp duty that shall be payable by the buyer and, if securities are issued otherwise, duty shall be paid by the seller. In case of a transfer of securities, the transferor shall be responsible for the payment of stamp duty regardless of the fact that the transfer is through a stock exchange, depository or otherwise.

Insertion of section 62A to the Act: Insertion of section 62A of the Act has introduced a new penalty provision to ensure that collection and transfer of stamp duty is done in a timely manner. It provides that, if any person required to collect the stamp duty, fails to collect the stamp duty or fails to transfer the stamp duty so collected within 15 days of the expiry of the time specified, theyshall be punishable with a fine which shall not be less than INR 1,00,000, but which may extend up to 1% of the collection or transfer so defaulted.

Intention behind amending the Act: Earlier, the stamp duty varied in different states; which allowed the parties to execute the instrument in the state with a lower rate of stamp duty to avoid a higher transaction cost. The parties preferred to execute instrument in the state with lower stamp duty which led to rate shopping and loss of revenue for the Government. The Amendments and the Rules have been brought into force to curb rate shopping. Earlier, the same instrument was also subject to multiple rates in different states which caused ambiguity for parties and would lead to higher duty being paid to err on the side of caution which overall increased the overall burden on parties. The Amendments and Rules also give clarity with regards to the person who is liable to pay the stamp duty. The Rules ensure that there is a proper mechanism and system in place to collect uniform stamp duty across India.

MHCO COMMENT:

The amendments and Rules will bring a significant impact on the securities transactions. Although, the cost of securities transaction has been increased by virtue of the amendments, the mechanism put in place by the Government will level the field for all investors dealing in securities. The amendment will also impact investments in mutual funds as they will be subject to double taxation- one being taxed when person invests in mutual funds and second when the funds are deployed by AMC for purchasing securities from the market. The amendments will help to generate higher revenue by charging stamp duty on securities instruments but will increase the burden on the investors. The amount of duty although minimal, will add to the overall burdensome transaction cost / levies which are already very high in India compared to other emerging markets and may act as an irritant for foreign investors looking to invest through the Mutual Fund route.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance

INDIAN ARBITRATION UPDATE | IMPLEADMENT OF NON-SIGNATORY GROUP COMPANIES

Delhi High Court (DHC) in the recent case of Magic Eye Developers Private Limited v Green Edge Infra Private Limited and Ors (2020 SCC OnLine Del 597), held that group companies can be impleaded in an arbitration proceeding even if they are not signatory to the Arbitration Agreement. The judgment places reliance on the judgments of the apex court which have evolved and accepted the “Group Companies Doctrine”.

FACTS:

• Magic Eye Developers Private Limited (Plaintiff) and Green Edge Infra Private Limited (Defendant No.1) entered into multiple agreements including a Shareholders’ Agreement (SHA), a Share Purchase Agreement (SPA), and a Memorandum of Understanding. (MOU). Defendant No.1 is involved in construction activities of Real Estate projects and other ancillary civil-engineering services. The Plaintiff, as a part of multiple transactions with Defendant No.1, also advanced loans to one Mr. S.K. Hooda, the erstwhile managing director of the Defendant No.1 company, at his request.
• Due to breach of contract by Defendant No.1, there were delays in the launch of the project of the Plaintiff. The Plaintiff filed a suit before the DHC claiming for recovery of loan and damages and compensation for loss of reputation. Plaintiff also claimed that Defendant No.1 is a sham company and is run as a front for money-laundering activities of the Hooda family.
• The Plaintiff also stated that the said family also runs two more companies, viz.,Vera Edu-Infra Pvt. Ltd (Defendant No.2), involved in the business of providing higher education and Vega Schools (Defendant No.3), which is involved in the buying/selling and renting of self-owned real estate. The Plaintiff impleaded these two companies in the suit as defendants. The Plaintiff made allegations on all the defendants, inter alia of money-laundering and defrauding innocent people to achieve the same.
• Defendant No.1, along with its written statement, also filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (the Act), claiming that the SPA contained an arbitration clause which amounted to an arbitration agreement between the Plaintiff and Defendant No.1. Since the agreements are interconnected, the dispute may be referred to the arbitration.
• The Plaintiff objected to such an application on the ground that the -
  
  • The dispute was not arbitrable because the claim included the recovery of loan, which was given under a separate loan agreement, which does not contain an arbitration clause, nor was such a loan contemplated under the SPA which contains the arbitration clause.
• Only the Defendant No.1 was a party to the agreements viz. the SPA, the SHA and the Loan Agreement, while Defendant Nos 2 and 3 are not party to the said agreements; thus they cannot be impleaded as a party to the arbitration.

ISSUES:

• Whether the dispute was arbitrable?.
• Whether the non-signatory entities could be impleaded in the Arbitration?

HELD:

The DHC allowed the interim application, and referred the parties to arbitration on the following grounds:

• As regards the arbitrability of the dispute, the court held that the claim for damages was based on the failure of Defendant No.1 to perform its contractual obligations under the various agreements. This was an arbitrable dispute duly governed by arbitration clauses under the various agreements. As such, the two reliefs were not required to be bifurcated and could be decided by arbitration.
• As regards the impleadment of Defendant Nos.2 and 3 in the arbitration, the court observed that the Supreme Court (SC) has interpreted the scope of Section 7 of the Act (which defines an Arbitration Agreement) to include non-signatories and held that they could be made parties to the arbitration. The DHC placed heavy reliance on two landmark judgments of the SC:
  
  
  • Chloro Controls India (P) Ltd. v Severn Trent Water Purification Inc (2013 (1) SCC 641) where it was held that under the “Group Companies Doctrine”, an arbitration agreement entered into by a company within a group of companies can bind its non- signatory affiliates, if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties.
• Cheran Properties Limited vs Kasturi & Sons Limited (2018 (16) SCC 413) where it was held that the “Group Companies Doctrine” is akin to the principle of implied consent, whereby the corporate affiliations among distinct legal entities provide the foundation for concluding that they were intended to be parties to an agreement, despite their formal status as non-signatories.

MHCO Comment: The question of impleadment of non-signatories in the arbitration has been a long-discussed one in Indian jurisprudence. The courts have held that the scope of Section 7 read with Section 35 (finality of arbitral awards) of the Act is wide enough to include non-signatories under certain circumstances. The DHC in this case reaffirms the “Group Companies Doctrine” and holds that the group companies can be made a party to the arbitration even if they are not a signatory to the arbitration agreement.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance

REGULATORY UPDATE | RBI CRACKS THE WHIP ON LENDING INSTITUTIONS

Owing to the continuing lockdown due to the Covid-19 pandemic, many digital platforms have emerged who provide quick and hassle free loans to borrowers. Banks and Non- Banking Financial Institutions (NBFCs) have also registered with certain digital platforms to provide loans to their customers. Further, certain NBFCs have been registered with the RBI as ‘digital- only’ lending entities, who provide loans to customers on their own digital platforms. Therefore it has been observed that banks and NBFCs have been lending to customers, either through their own digital platform or through a digital platform under an outsourcing agreement. In light of the above, the Reserve Bank of India (RBI) on 24 June 2020, issued a notification (Notification) to banks and NBFCs with respect to lending to customers on digital platforms.

This Notification has been issued due to increasing complaints received by the RBI against these digital lending platforms. The complaints received primarily relate to (a) excessive rates of interest; (b) non- transparent methods to calculate interest; (c) harsh recovery measures; (d) unauthorised use of personal data; and (e) general bad behaviour. It has often been seen that the digital lending platforms do not close disclose the name of the bank or NBFC who is actually providing the loan and therefore the customers do not have access to the grievance redressal mechanisms in case of an issue.

The RBI in this Notification urges banks and NBFCs to adhere to the fair practices code and outsourcing guidelines to ensure more transparency in their transactions, be in on their own digital lending platform or a digital lending platform under an outsourcing agreement. The Notification reiterates on the fact that outsourcing the lending responsibility to digital lending platforms does not in any way diminish the responsibility that banks and NBFCs have. Further, the onus is on the banks and NBFCs to adhere to any regulatory instructions issued.

The RBI has issued the following directions to banks and NBFCs with respect to their digital lending platforms:

• Names of digital lending platforms engaged as agents shall be disclosed on the website of banks/NBFCs;

• Digital lending platforms engaged as agents shall be directed to disclose upfront to the customer, the name of the bank / NBFC on whose behalf they are interacting with him;

• Immediately after sanction but before execution of the loan agreement, the sanction letter shall be issued to the borrower on the letter head of the bank / NBFC concerned.;

• A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement shall be furnished to all borrowers at the time of sanction / disbursement of loans;

• Effective oversight and monitoring shall be ensured over the digital lending platforms engaged by the banks / NBFCs;

• Adequate efforts shall be made towards creation of awareness about the grievance redressal mechanism.

The RBI has not yet disclosed the penalties for violating these directions, though the Notification mentions that the violation will be viewed seriously.

MHCO COMMENT:

With the advancement in technology, the fintech startups provide quick, hassle free loans to customers. Based on the grievance received from these borrowers, RBI vide this Notification has ensured more transparency for the customer, especially with respect to the grievance redressal mechanisms. Although the RBI has not issued a penalty for the violation, we believe that the penalties for the violation of these directions are incumbent.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance

IBC UPDATE | NCLAT DIRECTS THE SALE OF ASSETS OF THE CORPORATE DEBTOR |OVERRIDES THE CLAIM OF SECURED CREDITOR

The National Company Law Appellate Tribunal (NCLAT) recently passed an Order directing the liquidator of Surana Power Limited (Corporate Debtor) to complete the liquidation process of the Corporate Debtor and rejected Bharat Heavy Electricals Limited`s (BHEL) claim of realising security interest over certain assets of the Corporate Debtor, over which BHEL had a lien.

BACKGROUND

The Chennai Bench of the National Company Law Tribunal (NCLT) had passed an order initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor on 20 January 2019. As no resolution plan was approved, the Corporate Debtor was ordered to be liquidated. BHEL had succeeded in an arbitration proceeding against the Corporate Debtor, and an arbitral award, granting BHEL a lien on certain assets and equipment (Assets) of the Corporate Debtor was passed in favour of BHEL, thus making it a secured creditor. The Assets over which BHEL had been granted a lien were the ones which were already hypothecated to all other secured creditors.

However, the liquidator could not proceed with the liquidation process of the Corporate Debtor, as BHEL conveyed its unwillingness to relinquish the security interest over the assets of the Corporate Debtor. All the other secured creditors, representing 73.76% of the value of the total secured assets, had already relinquished the security interest into the liquidation estate. In light of the above, the liquidator filed an application before the NCLT, seeking permission to sell the assets of the Corporate Debtor and distribute the proceeds thereof in accordance with section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC).

The NCLT held that any person having a lien over an asset has a right to enforce the lien against the asset in preference to any charge of hypothecation created over that asset. Thus, the NCLT observed that BHEL, being a secured creditor by virtue of a lien, was entitled to realise security interest in terms of Section 52 of the IBC and the liquidator could not dispose of the Assets as per Section 53 of the IBC.

The order of the NCLT was challenged before the NCLAT by the liquidator.

NCLAT observed that:

• A deadlock situation had arisen wherein the liquidator was not able to sell the Assets due to the legal bar created by the proviso to Regulation 32 of the Insolvency And Bankruptcy Board Of India (Liquidation Process) Regulations, 2016, which requires the relinquishment of security interest from all the secured creditors before proceeding with the sale of such secured assets, despite secured creditors representing more than 73% of the value of the secured assets having relinquished their security interest.
  
• For the purpose of the IBC, all the secured creditors are on the same footing, regardless of the mode of creation of charge. Thus, BHEL, a secured creditor, stands at par with the remaining ten other secured creditors.
  
• The enforcement of security interest is governed by Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). As per Section 13(9) of the SARFAESI Act, any step regarding the realization of security interest by the secured creditors requires confirmation from the creditors having at least 60% of the value of total debt.
  
• In the present case, the secured creditors, representing 73.76% of the value of the total secured assets, have already relinquished the security interest into the liquidation estate. Thus, it would be prejudicial to stall the liquidation process solely at the instance of BHEL, having only 26.24% of the value of the secured assets.
  
• Since BHEL does not have the requisite 60% share in value, it does not have right to realize its security interest, because it would be detrimental to the liquidation process and the interest of the remaining ten secured creditors.
  
• Thus, in light of the above, the NCLAT reversed the decision of the NCLT, and directed the liquidator to complete the liquidation proceedings as per Section 53 of the IBC.

MHCO Comment: This decision of the NCLAT paves the way for liquidators, who may face problems due to minority secured creditors unwilling to relinquish security interest, and thus, delaying the liquidation process. The requirement of having at least 60% of the value of the secured assets, in order to realise security interest, will ensure a smooth and prompt liquidation process. Further the order of the NCLAT also makes it clear that the waterfall mechanism for liquidation under the IBC cannot be stalled by virtue of an arbitration award.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance

INDIAN ARBITRATION UPDATE | THRESHOLD FOR INTERIM ORDERS IN AN INTERNATIONAL ARBITRATION MATTER

Delhi High Court (DHC) in a recent Case Goodwill Non-Wovens Private Limited v XCoal Energy & Resources LLC,clarifies the threshold required for obtaining interim reliefs under Section 9 of the Arbitration and Conciliation Act 1996 (Act) with respect to Arbitrations seated outside India. The Court held that along with a strong prima-facie case, the petitioner must also satisfy the Court that the Respondent is acting in a manner so as to defeat the realization of the future award which may be passed in favour of the petitioners.

FACTS OF THE CASE:

• Goodwill Non-Wovens Private Limited (Petitioner) being an Indian company and XCoal Energy & Resources LLC (Respondent) – being coal marketing and logistics company based out of United States of America (USA) entered into a contract for sale and delivery of 13,500MT of Consol BEFH US High CV Thermal Coal at the designated port.
• On alleged default of the Respondent, the Petitioner terminated the contract and intended to initiate arbitral proceedings at the International Chamber of Commerce (ICC) against the Respondent for the refund of monies remitted under the contract and for damages. The Petitioner, in the interim, sought to secure the dispute amount through Section 9 petition on the following grounds:
  
  
  • Section 9 of the Act is applicable to Part II arbitrations, and Indian Courts have time and again upheld this position;
  • In the wake of COVID-19 pandemic, it was difficult to obtain a speedy remedy under the ICC Rules, given the procedural timelines;
  • The provisions in ICC Rules do not oust the jurisdiction of any competent judicial authority, and thus the Petitioner had the liberty to approach this court even after considering the ICC Rules;
  • There was an apprehension that the Respondent may obstruct the realization of the final award which may be passed in favour of the Petitioner.


• Respondent offered a 3-fold objection to the Petitioners contentions:
  
  
  • The Petition was not maintainable, because the Act allows application of Section 9 to only such Part II arbitrations, the final award whereof would be enforceable in India. Contending that the court, under this provision, have asset-based jurisdiction, the Respondent challenged the maintainability of the petition itself, as the Respondent does not have any assets situated in India.
• Secondly, it was contended that the powers of the Court to grant interim relief has to be exercised scarcely and in accordance with the conditions laid down in Order 38 Rule 5 of the Code of Civil Procedure, 1908 (CPC).
• Thirdly, it was stated that the ICC Rules contained provisions for emergency arbitration whereby quick and speedy remedy can be availed by the Petitioner. The special conditions arisen due to the COVID-19 pandemic are not enough for the Petitioner to bypass that remedy and approach the Court under Section 9 of the Act.

ISSUES

• Whether the Petition was maintainable?
• Whether the Petitioners had a good prima facie case?
• Whether the interim relief could be granted in view of the spread of COVID-19?
• Whether Section 9 of the Act had to be read with Order 38 Rule 5 of the CPC?

HELD:

The Delhi High Court dismissed the petition on the following grounds:

• While upholding the maintainability of the Petition, the Court held that the exercise of powers of the Court under Section 9 of the Act did not explicitly require any assets of the Respondent to be situated within the jurisdiction of the Court.
• While examining the question of whether any interim relief could be granted in a Part II Arbitration, the Court set out 2-point threshold that must be satisfied by the Petitioner, viz:
  
  
  • The Petitioner must satisfy the Court that it has a good prima facie case.
• There must be a reasonable apprehension that the Respondent is acting in a manner so as to obstruct the satisfaction of the final award.

• As regards the prima facie case, the Court observed that there were disputed facts between the parties and required a consideration on merits, which cannot be done in the present petition and has to be decided by the Arbitral Tribunal during the Arbitration Proceedings.
• The Court cited a number of judgments of various High Courts and placing heavy reliance on Ajay Singh Case stating that the underlying principles of Order 38 Rule 5 of the CPC (i.e. attachment before judgement) must be borne in mind while exercising the power under Section 9 of the Act. The conditions imposed by Order 38 Rule 5 of the CPC are as follows:
  
  
  • That the Respondent is about to dispose of the whole or any part of his property, or
• That the Respondent is about to remove the whole or any part of his property from the local limits of the jurisdiction of the Court.
Since there was no material on record to substantiate such an apprehension, the court rejected this plea of the Petitioner.

• Thirdly, it was also held that the special circumstances arisen due to the COVID-19 pandemic did not have a bearing on the facts of the present case and thus the Petitioner was not entitled to any relief as prayed for.

MHCO Comment: In this Judgment the court has clearly spelt out the scope of its powers under Section 9 of the Act and has reaffirmed that the underlying principles of attachment before judgement must be kept in mind while exercising these powers. It has clearly pointed out the conditions which must be satisfied for obtaining relief under the said provision.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance