Every word in a statute matters, but not every case is decided by its words alone. Knowing when courts apply the Literal Rule and when they adopt the Purposive Approach lies at the heart of judicial interpretation.

Imagine a law stating, “No vehicles are allowed inside the park.” Read literally, even an ambulance entering to save a life would violate the rule. Yet, no one would argue that the law intended to prevent emergency services from entering the park. The objective of the law is to prevent noise, pollution and disturbance, not to obstruct life-saving assistance.

Before examining how this debate played out in a recent tax dispute of 241 Crore, it is useful to understand these two principles.

•  Literal Rule

The Literal Rule requires courts to interpret a statute according to the ordinary and natural meaning of its words. Where the language is clear and unambiguous, the provision must be applied exactly as written, even if the outcome appears harsh or inconvenient.

• Purposive Approach

The Purposive Approach requires courts to interpret a statute by considering the object and purpose behind the legislation. Instead of focusing solely on the literal wording, the court adopts the interpretation that best advances the legislative intent.

The significance of this distinction became evident in the recent Mumbai ITAT ruling in Sterling Holiday Resorts Ltd. v. ITAT, where the interpretation of a single statutory condition resulted in the denial of tax benefits relating to accumulated business losses of over ₹240 crore that were sought to be transferred from the Demerged Company to the Resulting Company.

In this case, the Mumbai ITAT examined whether the Resulting Company was entitled to carry forward the accumulated business losses of approximately ₹240.15 crore under Section 72A of the Income-tax Act. The dispute arose because, instead of the Resulting Company issuing shares to the shareholders of the Demerged Company, the shares were issued by the Holding Company of the Resulting Company. This raised the question of whether the condition prescribed under Section 2(19AA)(iv), which specifically requires the Resulting Company to issue its shares as consideration for the demerger, had been satisfied.

What Happened in Sterling Holiday Resorts India Ltd?

Under the Scheme of Arrangement, the Holiday Activity Undertaking of Sterling Holiday Resorts India Ltd. was transferred to Thomas Cook Insurance Services (India) Ltd., the Resulting Company. However, instead of the Resulting Company issuing shares,

Thomas Cook (India) Ltd., its Holding Company, issued shares to the shareholders of Sterling Holiday.

This raised an important question:

Can a demerger qualify under Section 2(19AA) when the Holding Company, and not the Resulting Company, issues the shares?

The Tribunal answered this question in the negative and holds that losses cannot be carried forward and set off in absence of satisfaction of conditions specified under section 2(19AA) IV of the Income Tax Act.

Before analysing the Tribunal’s reasoning, an obvious question arises: Was this the first time such a demerger structure, where shares as consideration were issued by an entity other than the Resulting Company, had been adopted? Surprisingly, the answer is “No”. Several similar schemes had already received approval from the NCLT.

B.     Asian Granito India Limited. *

The NCLT, Gujarat approved a scheme where the Adicon Tiles Manufacturing Undertaking was transferred to Adicon Ceramics Limited, while the consideration was discharged through the issue of shares by Asian Granito India Limited. The scheme also permitted the transfer of unabsorbed depreciation to the Resulting Company.

B.     Cello Group Restructuring. **

Wim Plast Ltd. transferred its undertaking to Cello Consumer Products Pvt. Ltd., a wholly owned subsidiary of Cello World Ltd. However, instead of the Resulting Company issuing shares, the consideration was discharged by Cello World Ltd., the Holding Company of the Resulting Company.

B.     Ajmera Realty & Infra India Ltd.***

An even more interesting structure was approved in the case of Ajmera Realty & Infra India Ltd. Here, the Resulting Company was a wholly owned subsidiary of the Demerged Company. Instead of the Resulting Company issuing shares, the Demerged Company itself, being the Holding Company, issued additional shares to its existing shareholders as consideration. This represented a significant departure from the conventional mechanics of a demerger.

These precedents demonstrate that commercially similar structures have been recognised and approved.

If similar demerger structures had already been approved by the NCLT, where shares were issued by an entity other than the Resulting Company, then why did the Mumbai ITAT still deny the benefit of carry forward and set-off of losses under Section 72A?

The answer lies in the Tribunal’s Literal interpretation of Section 2(19AA). While denying the benefit under Section 72A, the Mumbai ITAT made the following key observations:

• The Supreme Court has consistently held that tax statutes must be interpreted strictly. Where the language of a provision is clear and unambiguous, courts must apply it as written without adding or substituting words.
• Section 2(19AA) grants tax neutrality only if every prescribed condition is fulfilled, including the requirement that the Resulting Company must issue shares to the shareholders of the Demerged Company.
• In the present case, the shares were issued by the Holding Company of the Resulting Company instead of the Resulting Company Itself. Accordingly, the Tribunal held that the mandatory condition under Section 2(19AA) was not satisfied.
• The Tribunal further observed that a Holding Company and its subsidiary are separate legal entities. Therefore, a Holding Company cannot discharge a statutory obligation that the law specifically imposes upon its subsidiary.

Accordingly, the Tribunal held that the demerger did not satisfy the conditions prescribed under Section 2(19AA) and denied the benefit of carry forward and set-off of losses under Section 72A.

Conclusion:

The Sterling Holiday ruling is a reminder that statutory interpretation is not merely a rule of construction but can determine the fate of an entire transaction. While the Tribunal preferred the Literal Rule, the existence of similar NCLT-approved schemes keeps the debate on purposive interpretation alive. As higher courts examine the issue, the decision may ultimately clarify whether, in tax law, words alone prevail or legislative intent also has a role to play.

*https://aglasiangranito.com/Intimations_Disclosures/Draft-Scheme-of-Arrangement.pdf

**https://nsearchives.nseindia.com/corporate/CELLO2023_15052026192852_C WL_Upload_Signed.pdf

***https://ajmera.com/wp-content/uploads/2024/07/NCLT-order-approving-the-Scheme-of-Arrangement.pdf?utm

Article by
Ankur Shukla

The post Lessons from the Sterling Holiday Ruling Denying Tax Benefits of Over ₹240 Crore by Income Tax Appellate Tribunal. first appeared on MMJC.

Do you mean Pachaas tola…?????

For those who have watched movie Vaastav, the dialogue immediately brings back the iconic scene where Sanju’s character proudly talks about the 50 tola gold chain.

But in the world of corporate restructuring, “pachaas tola” can have a very different meaning.

Here, it was not 50 tola of gold. It was ₹50 crore of stamp duty.

Stamp duty on merger / demergers is that climax which often can be unexpected twist in the story, while it’s thrilling to see such twist in Movies and OTT series but in real life corporate transactions it comes with consequences in terms of cost. One of such case where climax of the transaction was difficult to agree upon was taken up before Hon’ble Bombay High Court in Schaeffler India Limited v. Chief Controlling Revenue Authority, decided on 18 February 2026.

Schaeffler India Limited (“SIL”) filed a composite scheme under Sections 230–232 of the Companies Act, 2013, involving the amalgamation of two transferor companies, INA Bearings India Private Limited (“INA”) and LuK India Private Limited (“LuK”), with SIL.

SIL and INA were within the jurisdiction of the NCLT, Mumbai, whereas LuK was within the jurisdiction of the NCLT, Chennai. Consequently, the same composite scheme was placed before both Benches. The NCLT, Chennai sanctioned the scheme on 13 June 2018, followed by the NCLT, Mumbai sanctioning the scheme on 8 October 2018.

Maharashtra stamp authorities (MSA) while adjudicating the matter considered the stamp duty payable of ₹ 50 Cr subject to cap of ₹ 25 Cr pursuant to notification of 6 May 2002 and relied on section 5 of Maharashtra stamp act (herein after “the Act”) i.e,

“Any instrument comprising or relating to several distinct matters or transactions shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters or transactions, would be chargeable under this Act.”

MSA considered following points of arguments:

1. NCLT, Mumbai in its order had considered the composite scheme which included the amalgamation of INA with SIL as well as LUK with SIL and therefore, the same constituted two different transactions.
2. Scheme of Amalgamation is Instrument since it considers two different transactions and not the order of NCLT
3. Implementation of the scheme is in Maharashtra, it would give jurisdiction to the Maharashtra stamp authorities to levy stamp duty on NCLT, Chennai order.

Arguments on behalf of SIL were

1. Section 3 of the Act contemplates payment of stamp duty on Instrument and not the underlying transaction and in given case instrument is NCLT Order and not Scheme of amalgamation (Relied on Chief Controlling Revenue Authority, Pune And Another vs Reliance Industries Limited, Mumbai And Another)
2. Multiple transactions in same scheme cannot be charged for Stamp duty separately (Relied on Ambuja Cement Limited vs Chief Controlling Revenue Authority 2)

Bombay High Court Relied on the judgements in case of Reliance Industries Limited and Ambuja cement limited and validated following points

1. Stamp duty is on the instrument, not the underlying transaction: The Court held that the stamp authorities cannot assess stamp duty by dissecting the underlying commercial transactions when the statute makes the NCLT sanction order the chargeable instrument. Therefore, the fact that two transferor companies were being amalgamated into SIL did not, by itself, mean that the single NCLT Mumbai order could be treated as two separate transaction /instruments for stamp-duty purposes.
2. Section 5 cannot be used to split a composite NCLT order: The Court examined Section 5 and held that its application requires an examination of whether an instrument comprises several distinct matters or transactions. However, applying Section 5 in the present circumstances would necessarily require the stamp authorities to look behind the NCLT order and segregate the underlying amalgamations.

The Court held that such an approach was impermissible because the instrument chargeable to stamp duty is the order of sanction, and not the underlying scheme or each individual amalgamation contained within it.

The Bombay High Court quashed the orders demanding stamp duty of ₹50 crore. It held that stamp duty was payable on the NCLT Mumbai order dated 8 October 2018, under Article 25(da) of the Maharashtra Stamp Act, 1958, subject to the applicable maximum cap of ₹25 crore.

It is interesting to learn following Principles out of this case and the cases referred therein

• Stamp Duty is always levied on Instrument and in case of Merger & Demergers Instrument is Order Sanctioned by NCLT, so if scheme and Order differs in any way, NCLT Order will be considered as Instrument for Stamp Duty Purpose.
• Two Different NCLT Orders will result in Stamp Duty in Two Different States and neither of the state stamp Authorities has power to levy stamp duty on the NCLT order of other state.
• Where Multiple Transactions are involved through one document it needs to be looked into in the context of whether each transaction is leviable for Stamp Duty and that may not be possible in case of scheme matters.

For composite schemes of merger and Demergers, the judgment provides important protection against artificially multiplying stamp-duty liability merely because more than one transferor company is involved.

The Article is written by Partner – Mr. Omkar Dindorkar.

The post Pachaas Crore Ki Stamp Duty…. first appeared on MMJC.

Schemes of mergers, demergers, and various other arrangements (hereinafter “Corporate Restructuring”) involving listed entities have been seen increasing at a greater pace in recent times. Listed entities involved in the scheme of arrangement have to seek a No Objection letter from stock exchanges¹. Corporate Restructuring involving listed entities, SEBI Registered Intermediaries, and certain individuals forming part of these listed entities, must comply with and ensure the ‘fit and proper’ person criteria. During corporate restructuring, stock exchanges check this criterion on behalf of the Securities and Exchange Board of India (‘SEBI’). Fit and Proper person criteria seek to check if the entities involved in the corporate restructuring are morally and ethically sound.

Fit and Proper checks have always been crucial in the eyes of SEBI. It has always placed provisions for checking ‘Fit and Proper’ person criteria for intermediaries registered with it. SEBI periodically checks fit and proper person criteria in the case of registered intermediaries. Hon’ble National Company Law Tribunal also screens the cases of Corporate Restructuring on the grounds of “Fit & Proper”.

Considering this, it is vital to understand what can be considered fit and proper while undergoing any corporate restructuring and to establish a few precedents in this regard

Fit and Proper Person Criteria as is stated by SEBI in Schedule II of SEBI (Intermediaries) Regulations, 2008 is also applicable for Corporate Restructuring. The criteria are as follows:

(a) integrity, honesty, ethical behaviour, reputation, fairness and character of the person;

(b) the person not incurring any of the following disqualifications:

• criminal complaint or information under section 154 of the Code of Criminal Procedure, 1973 (2 of 1974) has been filed against such person by the Board and which is pending;
• A charge sheet has been filed against such person by any enforcement agency in matters concerning economic offences and is pending;
• an order of restraint, prohibition or debarment has been passed against such person by the Board or any other regulatory authority or enforcement agency in any matter concerning securities laws or financial markets, and such order is in force.
• the Board has initiated recovery proceedings against such person and are pending;
• an order of conviction has been passed against such person by a court for any offence involving moral turpitude;
• any winding up proceedings have been initiated or an order for winding up has been passed against such person;
• such person has been declared insolvent and not discharged;
• such person has been found to be of unsound mind by a court of competent jurisdiction, and the finding is in force;
• such person has been categorised as a wilful defaulter; (x) such person has been declared a fugitive economic offender; or
• any other disqualification as may be specified by the Board from time to time.

Schedule II of SEBI (Intermediaries) Regulations, 2008 gives that “Fit and Proper” criteria shall apply to the following persons

• the applicant or the intermediary
• the principal officer, the directors or managing partners, the compliance officer and the key management persons by whatever name called; and
• the promoters or persons holding controlling interest or persons exercising control over the applicant or intermediary, directly or indirectly. Provided that in case of an unlisted applicant or intermediary, any person holding twenty per cent or more voting rights, irrespective of whether they have controlling interest or exercise control, shall be required to fulfil the ‘fit and proper person’ criteria.
• Explanation– For the purpose of this sub-clause, the expressions “controlling interest” and “control” in the case of an applicant or intermediary shall be construed with reference to the respective regulations applicable to the applicant or intermediary.

Precedents – ascertainment of Fit & Proper criteria and rejection of schemes

Recently, in a few cases, it is seen that stock exchanges have been rejecting schemes on the grounds of listed Intermediaries, and individuals forming part of these listed Intermediaries have not complied with the criteria of “Fit & Proper”. A couple of schemes that were rejected based on ‘Fit & Proper’ person criteria are as follows:

• In the case of the Proposed Scheme of arrangement between Motilal Oswal Financial Services Limited (transferor or resulting Company) and Glide Tech Investment Advisory Private Limited (transferee Company) and Motilal Oswal Wealth Limited (Demerged Company) and their respective shareholders. It was seen that the Stock exchange had denied the NOC under Regulation 37 of SEBI LODR on the grounds that one of the directors was named in the Chargesheet filled by “The Economic Offence Wing, Mumbai in the matter of their investigations into irregularities at National Spot Exchange Limited which was disqualifying him under “Fit & Proper Criteria” of Schedule II of SEBI (Intermediaries) Regulations, 2008
• In the Case of Scheme of arrangement between IIFL Securities Limited and 5Paise Capital Limited and their respective shareholders and Creditors: In this case, the chargesheet by Economic Offence Wing [‘EOW’] questioned the “Fit & Proper” status of one of the directors of IIFL Securities Limited, and since the matter was sub-judice, SEBI/ Stock exchange was keen to understand the impact of penal action on the scheme of arrangement. In this case, the NOC was not issued, and Companies were asked to refile the scheme with additional information. Considering both the above cases, it indicates that SEBI/ Stock Exchanges are very clear that any non-compliance of the “Fit & Proper” Criteria under SEBI (Intermediaries) Regulations, 2008 may result in not entertaining any application of any scheme of merger, demerger or any other arrangements for Intermediary. Stock Exchanges may look into this Fit& Proper criterion during Corporate Restructuring because of the first and second proviso to clause 6 of Schedule II of SEBI (Intermediaries) Regulations, 2008.

NCLT & NCLAT Rejection due to Fit & Proper

In the matter of Hotel City Plaza Private limited v. Union of India in reference to the scheme of amalgamation, NCLT and NCLAT rejected the scheme on the grounds of violation of Sections 73 to 76A of the Companies Act, 2013, i.e. prohibiting the private limited companies from accepting or renewing any deposits from shareholders in excess of the aggregate of the paid-up capital, free reserves, and securities premium amount. Further, the Registrar of Companies had issued ‘Show Cause Notices’, and appellants had not responded. NCLAT, while passing the order, expressly stated as follows:

“Taking note of the surrounding facts and circumstances of the present case comes to an ‘inevitable’, ‘inescapable’ and ‘irresistible’ conclusion that the ‘Appellants’, had not made out a fit and proper case, for ‘Sanctioning the Scheme of Amalgamation’, in accordance with ‘Law’. Looking“

Considering the above case, the Hon’ble tribunals have clearly outlined that any non-compliance with the Companies Act, 2013, especially related to public deposits and the ignorance of show cause notices, is not a case of “Fit & Proper” for a scheme of merger.

Conclusion

The Conduct and actions of the Companies and the directors play an important role in demonstrating the “Fit & Proper” criteria before any corporate restructuring. Any violation of the criteria results in a loss of confidence by the regulator in the company and the intent of the transactions. Therefore, a pre- “Fit & Proper Criteria check” has become the unavoidable action point before any corporate restructuring.

This article has been published on Taxmann. The link for the same

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024216/fit-proper-criteria-impact-on-scheme-of-mergers-demergers-experts-opinion

The post “Fit & Proper Criteria”: Impact on Scheme of Mergers & Demergers first appeared on MMJC.

Regulation 37 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR’) mandates every listed entity desirous of undertaking a scheme of arrangement or involved in a scheme of arrangement under sections 230–234 and section 66 of Companies Act, 2013 to file the draft scheme of arrangement with the designated stock exchange(s) for obtaining the no-objection certificate, before filing such scheme with National Company Law Tribunal.

The designated stock exchange’s approach for granting the no-objection certificate is based on certain parameters identified by the stock exchanges. Designated stock exchange may issue an observation letter pursuant to which it shall direct modifications or omissions to be done in the respective scheme(s) filed with it or give mandates to adhere to specific provisions and circulars as specified by designated stock exchanges. It may also direct to incorporate its observations or comments in the scheme.

However, in certain circumstances Stock Exchanges may reject and return the scheme absolutely or subject to compliance of certain conditions. In this article, we shall study the list of schemes rejected by stock exchange and the reasons for rejecting the schemes.

Schemes rejected by the stock exchanges on repeated grounds:

• The stock exchange has rejected schemes on various occasions owing to breach of the Fit and Proper Status. Compliance with ‘fit and proper status’ is checked only when companies involved in scheme of arrangement are SEBI registered intermediaries. The reason of such rejections are as follows:
  • The scheme was rejected due to the chargesheet filed by the Economic Offence Wing against the Managing Director of the company proposed to be merged and the ongoing investigation into their ‘fit and proper’ status under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008¹. Given the potential legal ramifications and the uncertainty surrounding the Managing Director’s future, it was deemed necessary to assess the potential impact on the businesses of the Transferor, Transferee companies, and the proposed scheme of arrangement. This clarity was essential to ensure investors could make informed decisions regarding the viability and potential risks associated with the merger.
  • In another case the scheme was rejected owing to ongoing prosecution proceedings against the directors on the board of the Transferor Company and Transferee Company. Stock exchanges also directed the company to examine the impact of the proceedings on the scheme, companies, and investors.

Schemes rejected by the stock exchanges due to other miscellaneous reasons–

• The entities involved in scheme of arrangement have not meet the minimum public shareholding requirement under SEBI (LODR) and para (A)(3)(b) of Part – I of SEBI Master Circular dated 20^th June 2023². Further, SEBI advised to file fresh application by complying with the SEBI Circular.
• Draft scheme was not in compliance with clause III(A)(1)(a) of Annexure I of the SEBI Circular No. CFD/DIL3/CIR/2017/21³, i.e. the equity shares to be allotted by the Transferee company to the shareholders of the transferor companies was not sought to be listed, basis which SEBI has returned the draft scheme, and the company was advised to re-submit the same after ensuring compliance with the provisions mentioned in the circular.
• The draft Scheme was contingent upon the successful completion of a concurrent scheme, the timeline for which is currently uncertain. As a result, stock exchange decided to defer approval of the draft Scheme until the outcome of the concurrent Scheme is determined or until it receives NCLT approval.
• The Company executed a Slump Sale Agreement on September 6, 2023, and subsequently approved a Scheme of Amalgamation on September 25, 2023. The Scheme was contingent upon the successful completion of the Slump Sale. However, the Stock Exchange returned the Scheme as the Slump Sale condition precedent was not fulfilled at the time of applying for the No Objection Certificate under Regulation 37 of the SEBI (LODR).
• The Scheme for reduction of share capital between a company and its shareholders was rejected because incomplete information was submitted at first instance and even after repeated emails being sent for same by regulatory authorities.
• One of the companies to the scheme of merger had not applied for registration as NBFC under Section 45-1A of the RBI Act, 1934 and was wrongfully disclosing in its financial statement regarding having applied for registration as an NBFC. Further, the company was conducting NBFC activities without holding a certificate of registration issued by RBI, which is in violation of Reserve Bank of India Act, 1934. In view of the aforesaid, SEBI returned the draft scheme.
• SEBI has rejected the scheme basis the unresolved complaint of another company against the captioned scheme before the Hon’ble High Court, Kerala. SEBI has returned the scheme and has advised to re-submit the same upon resolution of the complaint and disposal of the case.
• The rationale of the scheme was based on the fact of the company having negative retained earnings however by the time the scheme of merger came for consideration before the stock exchange, the negative retained earnings had progressed to positive retained earnings owing to significant profits because of which the justification for the proposed scheme was no longer warranted and hence rejected by the exchange.
• As per NSE’s standard operating procedures dt: December 20, 2022⁴, draft scheme shall be filed within 15 days of approval of Scheme by the Board of Directors of the company but the same has been filed after 15 days which is in non-compliance of SEBI Standard Operating Procedures. Consequently, the scheme has been rejected.

Key Learnings for Successful Filling of Schemes with BSE

• Address any outstanding legal proceedings, financial instability, or unresolved disputes before filing a scheme.
• Conduct a thorough due diligence process to identify and address potential risks and issues.
• Keep abreast of any changes in SEBI guidelines to avoid non-compliance.
• Ensure strict adherence to SEBI regulations, particularly those related to minimum public shareholding, disclosure requirements.
• Reduce the risk of rejection, companies should strive to structure schemes independently, without making them contingent upon other transactions or schemes. This eliminates uncertainties and potential delays that could hinder approval.
• Companies should conduct a thorough analysis of the fit and proper status of their promoters, directors, and other key personnel. This involves assessing factors like legal ongoing proceedings, past legal records, financial history, and any potential conflicts of interest
• Assurance on Compliance with the SEBI Mater Circulars is a pre-requisite to mitigate the risk of rejection due to regulatory non-adherence.
• Companies should provide complete and accurate disclosures in their applications to stock exchanges. This includes details about the scheme, rationale for the merger, financial projections, and any potential risks or uncertainties.
• Avoiding Misleading / wrong information to Stock Exchange as along with rejection it can also lead to legal consequences.
• Ensuring that the Rationale for undertaking the scheme matches the current facts, situations, and circumstances.

Conclusion

In hindsight, study of the cases rejected by the stock exchange is crucial to anticipate the observations or reasons for rejection when preparing to file a scheme of arrangement. Study of these reasons would help stakeholders draft schemes in a better manner. In navigating the grounds behind scheme rejections by stock exchanges, it becomes evident that these decisions are not merely regulatory hurdles but essential safeguards for market integrity. By scrutinizing schemes thoroughly, stock exchanges aim the mitigation of risks, promotion of accountability and prevention of contingencies among other things.

This article has been published on Taxmann. The link for the same

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024474/deciphering-stock-exchanges-observation-in-giving-noc-to-draft-schemes-of-arrangement-experts-opinion

The post Deciphering Stock Exchange’s Observation in giving NOC to Draft Schemes of Arrangement first appeared on MMJC.

SEBI Master circular dated 20 June 2023 on (i) Scheme of Arrangement by Listed Entities and (ii) Relaxation under Sub-rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 already covers certain points(1) that should be looked into by audit committee (irrespective whether the transaction is with related party or not ) while recommending the draft scheme to the board of directors as follows:

• Need for the merger/demerger/amalgamation/arrangement
• The rationale of the scheme
• Synergies of business of the entities involved in the scheme
• Impact of the scheme on the shareholders
• Cost-benefit analysis of the scheme.

Now, since there is a specific SEBI Circular dealing with the Scheme of arrangement by Listed entities will it be sufficient only to comply with SEBI Master circular dated 20 June 2023?

RPT Industry Standards specifically does not cover any disclosures with regards to a transaction of merger/ demerger between related parties. 

The definition of related party transaction under 2(1) (zb) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’) is wide enough to cover the Merger / Demerger transactions.

Let us understand what is Related party Transaction in case of Merger / Demergers?

There may be two scenarios

• First, the transaction of merger/demerger itself is a related party transaction i.e, the consideration of merger/ demerger will have to be looked into and therefore disclosure under A1 to A5 and B1 may be warranted.
• Secondly, in case of Merger/ Amalgamations and demerger, all the assets and liabilities of the transferor company becomes the assets and liabilities of transferee company (under 2(1B) & 2(19AA) of Income tax Act,1961) and therefore disclosures related to all the balance sheet items i.e., B3 to B7 will be required to be disclosed to audit committee if those balance sheet items i.e., loans, Investments, Guarantees and borrowings of the transferor companies are with related parties of transferee company, as all this transactions will come under transferee company post-merger/demerger. 

What are Balance sheet item as per RPT Industry Standards?

• B (3) – Loans, inter-corporate deposits or advances given by the listed entity or its subsidiary.
• B (4) – Investment made by the listed entity or its subsidiary.
• B (5) – Guarantee (excluding performance guarantee), surety, indemnity or comfort letter, by whatever name called, made or given by the listed entity or its subsidiary.
• B (6) – Borrowings by the listed entity or its subsidiary; and
• B (7) – Sale, lease or disposal of assets of subsidiary or of unit, division or undertaking of the listed entity, or disposal of shares of subsidiary or associate.

SEBI Master circular dated 20 June 2023 relating to the scheme of arrangement by listed entities does not cover the aspects of disclosures to athe udit committee from the context of Merger /Demerger with related parties and therefore in case of a transaction of Merger/Demerger between a Listed Entity and the Company where shareholder to whom shares will be allotted is a related party or Loans, Investment, Guarantee and Borrowing is with related parties, the Listed entities will have to consider minimum information as per RPT Industry Standards.

The Regulators steps for increased disclosures around related party transactions is a clear message that Listed entities should follow the most Ethical and Transparent Business operations.

Under RPT Industry Standards, audit committee is expected to give justifications while approving certain transactions, further the comments of audit committees shall be recorded in the minutes of the meetings. It all indicates that Companies should run the business operations mutually exclusive and avoid overlapping of horizontal business operations with common resources within multiple entities increasing related party transactions or avoid entities within the group having no incomes or no businesses and the toll of which are taken up by the other companies within the groups increasing the related party transactions.

Restructuring of Business Operations including mergers/ demerges may become a common trend with the Growing Governing provisions around related party transactions and its disclosures.

1. Part I, Para A (2) (c) of SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93 – dated June 20, 2023

The post Merger / Demerger – Related Party Transactions Minimum Disclosures to Audit Committee and Shareholders. first appeared on MMJC.

When it comes to interpretating   the law and resolving any confusion related to legal provision, the court’s judgement play a crucial role., The judiciary’s fundamental duty is to interpret the law to ensure justice. Consequently, court judgments serve as the most authoritative interpretations of legal principles. Landmark judgments set by courts are considered precedents and are followed when adhering to the law. In the context of the Supreme Court of India, its judgments are regarded as the paramount interpretations of the law and carry the same binding force as legislation.

In this article, we delve into a notable judgment delivered by the honourable Supreme Court of India on April 5, 2024. The Court analysed Article 10 of Schedule 1 of the Bombay Stamp Act, 1958, in conjunction with Sections 31(2) and 97 of the Companies Act, 1956. The objective was to determine the stamp duty payable by a company following an increase in its authorized share capital.

Facts of the case.

• Company: National Organic Chemical Industries
• Initial Authorized Capital: Rs. 36 Crores
• Increase in 1992: Authorized capital raised to Rs. 600 Crores (Stamp duty paid: Rs. 1.2 Crores)
• Amendment in 1994: Maharashtra government inserted a maximum cap of Rs. 25 Lakhs on stamp duty for share capital increases. At that time, the relevant provision stated:

• In 1994, the Maharashtra state government amended the Stamp Act to introduce a maximum cap of Rs. 25 Lakhs on stamp duty payable by companies upon an increase in share capital. The amendment read as follows:

“In exercise of the powers conferred by clause (a) of Section 9 of the Bombay Stamp Act, 1958, the Government of Maharashtra, having satisfied that it is necessary to do so in the public interest, hereby reduces, with effect from the 1st August, 1994, the maximum duty chargeable on Articles of Association of a Company under Article 10 of Schedule-I to the said Act, to Rs. Twenty Five Lakhs.”

• Further Amendment in 1995: Company increased capital to Rs. 1200 Crores (Stamp duty paid: Rs. 25 Lakhs)
• However, the company realized that this payment was inadvertent because the maximum stamp duty of Rs. 25 Lakhs payable on Articles of Association had already been paid by them in 1992. Consequently, the company sought a refund of the stamp duty from the Deputy Superintendent of Stamps, Maharashtra.

The honourable High Court ruled in favour of the company, ordering the refund of the duty along with interest. However, the State of Maharashtra challenged this decision before the Supreme Court.

State of Maharashtra’s Argument:

• Section 14A of the Bombay Stamp Act stipulates that any material modification to an instrument necessitates fresh payment of stamp duty.
• The state contended that each increase in share capital constitutes a new taxing event, even if the stamp duty had already exceeded the maximum cap.
• Further emphasized that the stamp duty exceeding the cap was paid before the amendment that introduced the limit, and therefore, the amendment should not have retrospective effect.

Company’s Counterargument:

• The company asserted that Form-5, which serves to notify the Registrar of Companies (ROC) about the increase in share capital, is not an instrument as per the Bombay Stamp Act.
• Furthermore, the company argued that an increase in share capital does not qualify as a material modification to the instrument.
• The company cited a precedent from the Allahabad High Court in the case of New Egerton Woollen Mills, In re, 1899 SCC OnLine All 22. The Allahabad High Court had addressed a similar question regarding stamp duty payable on a document that altered Articles of Association.

Looking at these arguments, the Court formed 2 questions of law. They are as follows:

1. whether the notice sent to the Registrar in Form No.5 is an “instrument” as defined under Section 2(l) of Bombay Stamp Act? And

• whether the maximum cap on stamp duty is applicable every time there is an increase in the share capital or it is a one-time measure.

Supreme Court’s Decision:

• The honourable Supreme Court concurred with the Allahabad High Court’s ruling.
• According to the Supreme Court, Form No. 5 serves as a prescribed method for sending notice of an increase in share capital or members to the Registrar within 30 days of passing such a resolution.
• The Registrar then records the increase in share capital or members and carries out necessary alterations in the articles.
• Stamp duty is affixed to Form No. 5 for practical convenience because a company cannot independently carry out alterations and record share capital changes in its Articles of Association.
• Ultimately, it is the articles themselves that qualify as an “instrument” within the meaning of Section 2(l) of the Stamp Act, and they are specifically mentioned in Article 10 of Schedule-I of the Stamp Act
• The Bombay Stamp Act is a fiscal statute and must be construed strictly. The court analyzed Article 10 and its placement in the schedule.  Column 1 describes the instrument on which stamp duty is levied.  Column 2 prescribes the stamp duty payable.
• Three situations are described in Column 1: “where the company has no share capital or nominal share capital or increased share capital” . The effect of adding “increased share capital” is that stamp duty will be charged on subsequent increases in the authorised share capital, subject to the maximum cap.
• In other words, the ceiling of Rs. 25 lakhs in Column 2 is applicable on Articles of Association and the increased share capital therein, not on every increase individually. In case stamp duty equivalent to or more than the cap has already been paid, no further stamp duty can be levied.”

As a result, the court in its order upheld the order of the lower court and ordered the state government to refund the stamp duty mistakenly paid by the company.

Position as on date:

As of the present date, the Supreme Court has provided clarity regarding the payment of stamp duty on increases in share capital. Although the case in question pertains to events from 1992 and 1994, it remains relevant today.

In 2015, the Bombay Stamp Act underwent an amendment through the Bombay Stamp Amendment Act 2015. This amendment introduced the term “increase” into Column 2 of Article 10 in Schedule I of the original Act. Consequently, the provision now stipulates that stamp duty should be paid on articles of association at a rate of 0.2% or a maximum of 50 lakhs for each individual increase in share capital1.

This legal development ensures greater clarity and consistency in the application of stamp duty provisions for companies undergoing changes in their authorized capital.

This article is published in Taxmann. The link to the same is as follows: –

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000023905/deciphering-stamp-duty-analyzing-the-supreme-courts-verdict-on-share-capital-augmentation-experts-opinion

This article is written by CS Vrushali Bhave – Senior Manager – RND Team – vrushalibhave@mmjc.in and Ms Rutuja Umadikar – Research Associate – RND Team – rutujaumadikar@mmjc.in

The post Deciphering Stamp Duty: Analyzing the Supreme Court’s Verdict on Share Capital Augmentation first appeared on MMJC.