Two far-reaching legal developments that will impact the transaction restructurings were published this month, following a Securities and Exchange Board of India (SEBI) circular amending clause 24 of the Equity Listing Agreement and a Delhi High Court decision imposing stamp duty on court approved schemes of amalgamation.

SEBI makes auditors certificates in amalgamations compulsory
SEBI's 5 April 2010 amendment circular CIR/CFD/DIL/1/2010 has made it compulsory for every listed company to furnish an auditor’s certificate while submitting any scheme of amalgamation, merger or reconstruction.

Such certificates must be in compliance with the Accounting Standards specified by the Central Government in Section 211 (3C) of the Companies Act, 1956.    

The development was alerted by Vaish Associates in a client update.

An explanation adduced to the newly inserted sub-clause has also clarified that mere disclosure of deviation in the accounting treatment shall not be deemed as compliance with the accounting standards for amalgamation.

Prior to the amendment the paragraph 42 of the Accounting Standard-14 provided for a different accounting treatment with respect to reserves of transferor companies upon amalgamation. Those reserves were subject to the required disclosures for the deviation in accounting treatment being made in the first financial statements post amalgamation.

After the present SEBI amendment the listed companies undergoing restructuring exercises would now have to provide justifiable reasons to the stock exchanges for any deviation in the accounting standards for obtaining no objection of the stock exchanges for the proposed scheme.

Vaish Associates wrote that the amendment would be "made applicable to all schemes that are being filed with the High Courts, having jurisdiction on the matter, on or after April 5, 2010."

The firm added: "An exception to the above mentioned amendment has been carved out with regard to companies where the respective sectoral regulatory authorities have prescribed certain specified norms for the accounting treatment of items in the financial statements contained in scheme, in which case, the requirement of the respective regulatory authorities shall prevail."

However, an exception to the requirement for an auditor's certificate while filing for amalgamation is carved out for those companies whose accounting treatment of items in the financial statements contained in scheme has been outlined by sectoral regulatory authorities.

The change is expected to bring in more accuracy, efficiency and transparency in the governance of listed companies.

Stamp duty now payable on court amalgamation orders
A recent decision of the Delhi High Court in the so-called Delhi Towers Case has held that stamp duty is payable on an order of the High Court sanctioning scheme of amalgamation under Section 394 of the Companies Act 1956.

The matter discussed in the company petition has led to the inclusion of an order approving the scheme of arrangement within the definition of conveyance under the Indian Stamp Act 1899 despite not having been provided as a specific entry in the schedule of the act.

Zeus Law Associates senior partner Sunil Tyagi said: "This decision will have a huge impact on all restructuring transactions. In real estate transactions for example, because of land ceiling rules land is bought in the name of different companies after which those companies are merged.  The merger of all those companies happen once a license is obtained for the conversion of agricultural to an urban land– there is major stamp duty avoidance there and stamp duty is saved which obviously reduces financial expenses also."

"Stamp duty will be imposed on all restructuring transactions. Before this decision no stamp duty was being charged on amalgamations in Delhi. In the absence of a specific entry in the stamp act, the courts were generally taking the view that it is not [amalgamations] liable to stamp duty.

"Now after this ruling even though there is no entry in the stamp act in Delhi for payment of stamp duty on amalgamation, stamp duty becomes payable unless this judgement is reversed by the Supreme Court."

The High Court of Delhi took into consideration the observations of Supreme Court and other High Courts in various cases on the issue while deciding that such court orders are covered within the ambit of ‘conveyance’, under sub-section 10 of Section 2 of the Indian Stamp Act, 1899 which has a wide meaning and is not confined to specific instruments mentioned in the relevant Stamp Duty Schedule and order of a court sanctioning the scheme of amalgamation is subject to Stamp Duty.

The court further held that notification no. 13 dated 25 December 1937 that provides for Stamp Duty exemption on certain transactions among holding and subsidiary companies, is still applicable in Delhi even if this notification is not specifically adopted by Legislative Assembly of Delhi. Therefore, no Stamp Duty is payable if the transaction is covered under this notification.

The issue of valuation of property and the basis of assessment for the purpose of stamp duty has also been resolved in the Delhi Towers Case. It was further clarified that in a case of amalgamation schemes sanctioned by the High Court, the consideration subject to stamp duty under the relevant act should be based on the valuation arrived at on the basis of shares allotted by the Transferee Company to the shareholders of the Transferor Company.

Even the small window for a contrary interpretation has been closed with the conclusion of this case. and it is now clear that the liability to pay Stamp Duty in Delhi will arise on all the Court orders approving schemes of amalgamation.

Citation: Delhi Towers Limited vs G. N. C. T. of Delhi CA No.466/2008, Company Petition No.50 of 2003