Introduction

In our article titled ‘Executing financial contracts in times of a pandemic’ dated April 21, 2020 (available here), we discussed execution of contracts electronically and the legal and evidentiary validity of digitally signing transaction documents, especially in light of the recent COVID-19 outbreak and resultant disruptions in traditional modes of execution of transaction documents. Practical challenges faced by parties in obtaining stamp papers is yet another result of the pandemic, severely impacting the due execution of such documents.

In the current economy where the risk of defaults looms large over banks and financial institutions, the aspects of due enforceability and admissibility as evidence, of transaction documents, becomes crucial; a key factor in such aspects is the stamping of such documents. The stamping of financing documents is a state subject   (barring a few specific instruments which fall within the purview of the central enactment) and parties would therefore need to refer to the stamp laws of the relevant state and any clarifications or relaxations issued by the relevant state government. The Central government has issued requests to various state governments to ‘not impose penalty in respect of loan agreement related instruments if stamped within a reasonable period (say, 30 days) following the withdrawal of the COVID-19 related lockdown.’ Based on publicly available information, it appears that so far only the state of Maharashtra has issued a clarification in this respect. Please see details below under heading ‘Recent Clarification in Maharashtra’.

For the state of Maharashtra, Section 34 of the Maharashtra Stamp Act, 1958 (“Maharashtra Stamp Act”) codifies the well settled principle that unstamped or inadequately stamped instruments are inadmissible in evidence. Additionally, Section 30A of the Maharashtra Stamp Act puts the onus on banks and financial institutions to ensure that instruments through which their rights flow (such as agreements relating to deposit of title deeds, pledge, mortgage) are adequately stamped.

Modes of Stamping

In the state of Maharashtra, there are primarily 4 modes of payment of stamp duty:

a. Non-Judicial Stamp Papers – This is the traditional, but cumbersome and time-consuming mode of stamping, and entails obtaining physical stamp papers by engaging with licensed vendors. The instrument to be executed is printed on such stamp paper(s). This option is not viable in cases where stamp duty of large denomination is required to be paid.

b. Franking – The process of franking a document entails submitting an application with an authorized bank or franking agency, making payment of the required stamp duty and affixation of stamp by the authorized bank or franking agency (using a franking machine) on the document by indicating the value of the stamp duty paid. Franking can only be undertaken prior to the execution of the document and has a maximum stamp duty cap of INR 5000 per document.

c. e-SBTR / Electronic Secured Bank Treasury Receipt – e-SBTR is an online payment service for payment of stamp duty through an electronic payment system. This requires the filling of an ‘input form’ and payment of the required amount of stamp duty through net banking / at a branch office with any bank that provides the e-SBTR facility. The bank then enters these details into the government virtual treasury and generates the e-SBTR on special government pre-printed secure stationery, which acts as a proof of payment of the stamp duty. As the e-SBTR is issued on the special government stationery, one is required to physically collect the e-SBTR from the concerned branch of the bank on presentation of a print of the input form and online payment confirmation towards stamp duty.

d. GRAS / Government Receipt Accounting System – Similar to e-SBTR, GRAS is also an online payment service for payment of stamp duty through an electronic payment system. However, unlike under the e-SBTR mechanism, there is no requirement to physically visit the concerned branch of the bank as the e-challan generated online under GRAS is recognized at the sub-registrar’s offices and other offices of the department as an accepted method of payment. Although a completely online process, the limitation of GRAS is that it can only be utilized for compulsorily registrable documents (under Section 17 of the Registration Act, 1908) which, inter alia, include instruments creating right, title and interest to or in immovable property. In financing transactions therefore, this mode would only be available for documents such as indentures of mortgage and cannot be utilized to pay stamp duty on other crucial but non-compulsorily registrable document such as loan agreements, security and guarantee documents.

Recent Clarification in Maharashtra

Offering some relief, the Office of the Inspector General of Registration and Controller of Stamps, state of Maharashtra has, by way of a circular dated April 27, 2020 (“Circular“), notified certain relaxations in relation to (a) filing of notice of intimation (which in case of financing transactions, is required pursuant to creation of mortgage over immovable property, by way of deposit of title deeds or equitable mortgage); and (b) payment of stamp duty on non-compulsorily registrable financing documents executed during the period of lockdown. The changes / relaxations introduced under the Circular are summarized in the table below.

Notice of intimation can be given within one working day of lifting of the lockdown in such district. Banks and other agencies may utilize the online platform made available on igrmaharashtra.gov.in for filing of intimation online. The Circular also clarifies that in light of the COVID-19 pandemic, it is intended by the administration to cease the practice of physical filing of notice of intimation from June 1, 2020.

The requirement to stamp documents and file the notice of intimation within ‘one working day’ from the date of lifting of the lockdown, as introduced by the Circular, is a highly onerous ‘relaxation’. Section 10 of the General Clauses Act , 1897 (and similarly Section 11 of the Bombay General Clauses Act, 1904) provides that in the event any act or proceeding is directed or allowed to be done or taken in any court or office on a certain day or within a prescribed period, then, if the court or office is closed on that day or the last day of the prescribed period, the act or proceeding shall be considered as done or taken in due time if it is done or taken on the ‘next day’ afterwards on which the court or office is open. The provisions set out above embody the general principle enshrined in the legal maxim lex non cogit ad impossibilia, in other words, the law does not compel a man to do that which is impossible. To this extent, the Circular provides no real relaxation over that arguably already available at law. The time frame of only one day to pay stamp duty and file notice of intimation for such documents executed during the lockdown would not only result in significant operational challenges for stamp authorities in contending with the increased volume of transactions on the day succeeding the end of lockdown,  but would also ironically be a significant health and safety hazard in these times.

Fully cognizant of the practical difficulties of the above timeline, the Circular further provides that in the event the payment of stamp duty (or filing of notices of intimation) is not achieved within one working day from the lifting of the lockdown, parties may make an application for adjudication by the Collector under Section 40 of the Maharashtra Stamp Act within one month of lifting of the lockdown (and one year of execution of documents) and in such case, no penalty will be required to be paid by the parties. Usually, in respect of adjudication, the stamp authority would need to be satisfied that the omission to duly stamp such instrument has been occasioned by accident, mistake or urgent necessity, to avoid the impounding of such document and imposition of penalties in respect thereof.  The deficient stamp duty (and penalties where applicable) once paid, the document is endorsed by the stamp authority and is deemed admissible in evidence and can be acted upon and authenticated as a duly stamped document.

Position in other states across India

Stamp paper is still available in certain cities of India, although not freely. In financing transactions, part of the documentation is often executed in a different state from the rest of the documentation. This is often the case with certain security documents. In determining the place of execution (and storage) during the lockdown, parties would be astute to also take into consideration the availability of stamp paper / other stamping options in the relevant state and any time relaxations such as provided under the Circular for Maharashtra. A few other states are also expected to issue clarificatory circulars on payment of stamp duty during the lockdown and it remains to be seen whether these circulars provide for a more reasonable time frame within which parties may safely procure stamp paper.

Conclusion

While the Circular currently provides clarity on payment of stamp duty in relation to financing documents in the state of Maharashtra, it fails to address the need for a similar window of relief for other commercial transactions. A clarification in this respect is much awaited. Similar clarifications for both financing and non-financing documentation are also much needed across the country.

The pandemic has not only affected the successful execution of commercial transactions but has also resulted in a huge dent in revenue for the government (both state and central), a significant percentage of which is received by way of stamp duties. To avoid a further hit to the government coffers, given the glaring probability that social distancing will be the new normal, the need of the hour is to find a solution for executing transactions seamlessly in a digital manner, with stamp duty payments and registrations being facilitated remotely from the safety of our homes. As regards stamping,  this need not require a complete overhaul of systems and may be achieved by widening the applicability of the e-SBTR system to include all values of stamp paper and replacing the currently physical e-SBTRs with secure e-stamp paper. This will certainly help alleviate some of the current obstacles in closing commercial transactions.

Please do not hesitate to reach out to the authors, Anand Shah (anand.shah@azbpartners.com), Hufriz Wadia (hufriz.wadia@azbpartners.com) and Kemi Gupta (kemi.gupta@azbpartners.com) for any clarifications.

Authors:
Anand Shah, Senior Partner
Hufriz Shah, Partner
Kemi Gupta, Associate