Shares Certificates and Stamp Duty Payment in India

In India apart from paying stamp duty on capital of the company, it’s also important to pay stamp duty on the issue of share certificates. Recently Indian Stamp (Collection of Stamp Duty) Rules 2019 introduced by the Finance Ministry where implemented from 1st July 2020, and have brought significant changes to stamp duty regulations. According to the Indian Stamp Act, a company is required to pay stamp duty to the Collector of Stamps, Treasury Officer, or Revenue Authorities of the respective state upon the issuance of a share certificate. e-Stamping is a modern method of paying stamp duty electronically for various documents, including share certificates. Traditionally, stamp duty was paid by affixing physical adhesive stamps or impressed stamps on the relevant documents. However, with the advancement of technology, many jurisdictions have adopted e-Stamping systems to streamline the payment and verification process.

The amendments in stamp duty rates in 2019 aim to establish uniform stamp duty rates nationwide and redefine the payment process for DEMAT securities. Stay up-to-date with the latest information to ensure compliance with the new rules. Adhering to the updated stamp duty regulations is crucial to ensure compliance with the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules, 2019. Therefore understand the uniform stamp duty rates for share certificates and transfers, and stay informed about the changes in the payment mechanism for DEMAT securities and more-

» Uniform Stamp Duty: The rules establish a centralized mechanism for the collection of stamp duty, streamlining the process and ensuring uniformity across transactions. The amendments have introduced a consistent stamp duty rate for transactions involving share certificates and share transfers across all states in India.

» Revised Stamp Duty Rates: The stamp duty rates have been set at 0.005% of the transaction value for share certificates and 0.015% for share transfers. Whether shares are in physical or demat mode, these rates are applicable.

» Changes in Payment Mechanism: The payment process for stamp duty on demat securities has undergone a significant transformation. Familiarize yourself with the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules, 2019, to understand the updated mechanism for paying stamp duty on demat shares.

» Enforcement and Compliance Measures: By rules introduce stricter enforcement measures to ensure compliance with stamp duty obligations. It is crucial to adhere to the rules to avoid penalties or legal repercussions.

» Digitization and Efficiency: The adoption of e-stamping and online payment methods expedites the stamp duty payment process, reduces paperwork, and enhances efficiency for both taxpayers and government authorities.

Provision regarding the issuance of securities by a private company under the Companies Act, 2013 under Section 23 of the Act, a private company can issue securities in the following ways:-

(a) By way of rights issue or bonus issue in accordance with the provisions of the Companies Act 2013: This means that a private company can issue securities to its existing shareholders on a pro-rata basis (rights issue) or issue bonus shares without any consideration (bonus issue). The terms and conditions for such issuances are governed by the relevant provisions of the Act.

(b) Through private placement by complying with the provisions of Part II Chapter III of the Companies Act 2013: Private placement refers to the issuance of securities to a select group of persons rather than to the general public. Section 42 of the Companies Act, 2013, deals with the provisions related to private placement. Private placement involves issuing securities to a maximum of 200 persons in a financial year (excluding qualified institutional buyers and employees under employee stock options). It also involves compliance with specific rules and regulations, including disclosures, allotment procedures, and filing requirements.

Hence, in accordance with the provisions of the Companies Act, 2013, a private company can issue securities through rights/bonus issues or private placement while complying with the relevant regulations

You know Private company can also borrow money from its directors and directors' relatives as a loan, as well as obtain secured loans from banks in case funds required -

» When a private company borrows money from directors and directors' relatives, it is not required to issue share certificates since it is considered a loan rather than the issuance of shares. but, it is imporatnt to document the loan transaction properly with a loan agreement or similar legal documentation.

» In the event that the company fails to repay the loan, the private company can convert the loan into equity in the future but that is totally subject to prior approval of shareholders at the time of taking loan. The conversion of loan into Equity is subject to shareholders' approval and the filing of Form MGT-14 with the Registrar of Companies (ROC). The Special Resolution authorizes the conversion of the loan into equity shares of the company at a predetermined conversion price or as per the terms agreed upon.

» the specific requirements and procedures for issuing securities, borrowing from directors, and converting loans into equity may vary depending on the jurisdiction and any additional regulations or guidelines provided by the relevant authorities.

1. Allotment within 60 days: The company is required to allot the shares within 60 days from the receipt of application money. This means that the shares should be allocated to the applicants within this specified timeframe.

2. Refund of Application Money: If the allotment is not done within 60 days, the company is obligated to refund the entire application money to the applicants within the subsequent 15 days.

3. Refund and Pay Interest 12% p.a and termed as Deposit under Section 73: If the refund is not made within 15 days from the expiry of the 60-day period, the company is required to refund the application money along with interest at a rate of 12% per annum. After the expiry of these 15 days, the amount, along with interest, will be treated as a public deposit.

Issuance of Share Certificates under Companies Act, 2013

1. In case of subscribers to memorandum: Share certificates should be issued to subscribers within 2 months from the date of incorporation of the company.

2. In the event of allotment of shares: Share certificates must be issued within 2 months from the date of allotment of shares to the shareholders.

3. In the case of transfer or transmission of securities: In situations where shares are transferred or transmitted, the company should issue share certificates within 1 month from the date of receiving the instrument of transfer or intimation of transmission.

Please note that these timelines and requirements may vary depending on the applicable laws and regulations in the specific jurisdiction. It is always advisable to refer to the relevant company laws, regulations, and the Companies Act of the respective country or consult with legal professionals for accurate and up-to-date information.

Allotment of Shares of Non-Resident  through Foreign Exchange Management Act (FEMA).

In the case of a wholly-owned subsidiary of a foreign company, there are specific time limits to be observed regarding the allotment of shares and the treatment of funds received. These time limits are outlined in the FDI Regulations, which are governed by the Foreign Exchange Management Act (FEMA).

According to the FDI Regulations, when a non-resident entity remits share application money to a wholly-owned subsidiary, the shares must be allotted within 180 days of the receipt of the application money. This means that the subsidiary company has a maximum of 180 days to allocate the shares to the non-resident entity.

On the other hand, Rule 2(c)(vii) of the Companies (Acceptance of Deposits) Rules, 2014, deals with the treatment of funds received for the subscription of shares. It states that if any amount has been received for the purpose of share subscription and the shares are not allotted within 60 days from the receipt of the funds, then the amount received shall be treated as a deposit.

Furthermore, as per the same rule, if shares are not allotted within the aforementioned 60-day period, the amount received as share application money must be refunded within 15 days from the expiry of the 60-day period. Failure to refund the amount within this timeframe will result in the funds being treated as deposits further with Interest 12%p.a in case of Private Placement.

Hence, in the case of a wholly-owned subsidiary of a foreign company, it is crucial to comply with both the FDI Regulations (allotment of shares within 180 days) and the Companies (Acceptance of Deposits) Rules (refund of unallotted share application money within 15 days from the expiry of 60 days) to avoid the funds being treated as deposits and potentially violating regulatory requirements.

Stamp Duty on Share Certificates in India

Stamp duty is a state-level tax imposed on various documents, including share certificates, to give them legal validity. The Indian Stamp Act, 1899, governs the payment of stamp duty in India, and the rates may vary across different states.

Share certificates (SH-1) are required to be stamped within 30 days from the date of issue. Stamp duty is a tax imposed on certain documents, including share certificates, to validate them legally. The stamp duty should be paid and the certificate properly stamped within the specified time period.

E-Stamping of share certificates offers several advantages over traditional stamping methods. It simplifies the stamp duty payment process, reduces administrative burdens, minimizes the chances of stamp duty evasion, and provides a secure and tamper-proof method of verification. Additionally, e-Stamping systems often offer online records and receipts, making it easier for parties involved in the transaction to maintain accurate documentation.

An "issue of share certificate" refers to the process of providing a physical or electronic document as evidence of ownership of shares to the shareholders. The share certificate contains details such as the name of the company, shareholder's name, share class, share number, and any other relevant information. Companies to adhere to these timelines to ensure compliance with the legal requirements and maintain proper record-keeping. Failure to issue share certificates within the prescribed timeframe or to stamp them within the specified period may result in penalties or legal consequences.

The company must submit certain documents, including the Memorandum of Association (MOA), Articles of Association (AOA), copy of the Board Resolution, copy of the share certificate, authorization letter, application form, and Form PAS-3 (Return of Allotment), to the Revenue Authorities and will assess the documents and determine the amount of stamp duty that the company needs to pay. This process is known as adjudication. After the adjudication, the company is required to deposit the share stamp duty with an authorized bank or institution. The company must then submit the acknowledgement of payment to the Officer of the Revenue Authority. Upon satisfaction with the documents and receipt of the payment, the Revenue Authority will issue a Certificate for the issuance of the share certificate to the company. This certificate serves as proof that the necessary stamp duty has been paid, and the company can proceed with the issuance of the share certificate to the respective shareholder.

A Step-by-Step Guide to Paying Stamp Duty for Share Certificates in India

To pay the stamp duty for the issue of share certificate, you would need to follow the stamp duty regulations applicable in your respective state. Further, The stamp duty rates and procedures may vary from state to state in India

Follow the below process for paying stamp duty for the issue of share certificate in the Private Limited Company/Start-up Company-

» Determine the applicable stamp duty rate: Check the stamp duty rates applicable in your state for issuing share certificates. These rates are typically specified in the state's stamp duty schedule or notification.

» Calculate the stamp duty amount: Calculate the stamp duty amount based on the number of shares being issued and the applicable rate. The stamp duty is usually calculated as a percentage of the face value or market value of the shares, depending on the state's regulations.

» Purchase the stamp paper: Purchase non-judicial stamp paper of the required value for the calculated stamp duty amount. Stamp papers are usually available at licensed stamp vendors or designated government offices.

» Prepare the share certificate: Prepare the share certificate document with all the necessary details, including the stamp paper.

» Affix the stamp paper: Affix the purchased stamp paper to the share certificate document as per the stamp duty requirements. The stamp paper should be canceled by writing or printing the necessary details such as the date, amount, and name of the person affixing the stamp.

» Sign and seal the share certificate: The share certificate should be signed by authorized signatories of the company and affixed with the company's seal.

» Register the share certificate: Register the share certificate in the company's register of members and maintain proper records.

» Get the Document Stamped: Visit the Sub Registrar's Office or the authorized stamping center with the document and the paid stamp duty. Present the document to the designated officer for verification and stamping. The officer will authenticate the document by endorsing it with an official stamp or seal.

» Collect the Stamped Document: After the document has been stamped, collect the document from the office. The stamped document serves as proof of payment of stamp duty.

The process of paying stamp duty on share Certificates depends on the specific requirements and procedures may vary based on the regulations of your state and the stamp duty regulations applicable in your state for accurate and up-to-date information on issuing share certificates and paying stamp duty-

Statewise payment mode of Stamp duty 

1. Delhi: Stamp duty can be paid through the portal of Stock Holding Corporation of India Limited (SHCIL). This online portal facilitates the payment of stamp duty for the state.

2. Maharashtra (Mumbai): Stamp duty can be paid through the Maharashtra Government's GRAS portal (Government Receipt Accounting System) at https://gras.mahakosh.gov.in/echallan/. This portal allows users to generate e-challans for the payment of stamp duty. The value of the stamp should correspond to the applicable stamp duty rate as per the Schedule I of the Maharashtra Stamp Act.

3. Bangalore (Karnataka): Stamp duty in Bangalore can be paid through two methods: purchasing stamp paper or franking at the sub-registrar's office. You can either buy physical stamp papers from authorized vendors or choose the franking process, where the stamp duty is paid using a franking machine available at the sub-registrar's office.

4. Haryana/UP/Bihar/others: stamp duty can be paid through physical stamp papers, can be purchased from authorized vendors or licensed stamp vendors and stamp duty amount is calculated based on the value of the transaction. Current methods of stamp duty payment in Haryana by contacting the respective government authorities or the Sub Registrar's Office in state.

Under the Companies Act, 2013 and the Indian Stamp Act, 1899, stamp duty is applicable on the issue and transfer of shares. The rates of stamp duty may vary from state to state in India.

Further, the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules, 2019 came into effect from 1st July 2020. These rules aim to collect stamp duty on certain transactions through stock exchanges, clearing corporations, and depositories. The specific provisions and rates of stamp duty under these rules may differ from the general stamp duty rates applicable to share transfers.

The table we provided outlines the rates of stamp duty and the entities responsible for payment during the issue or transfer of shares.

A summarized version of the information provided:-

The mentioned rates of stamp duty apply in accordance with the Indian Stamp Act, 1899, and the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules, 2019. These rules have been in effect since July 1, 2020. Hence The Indian Stamp (Collection of Stamp Duty) Rules 2019 introduced by the Finance Ministry have brought significant changes to the stamp duty regime.

Q. What is Share Certificates and its format under Companies Act 2013 ?

Share certificates are legal documents that serve as evidence of ownership or investment in a company. When a company issues shares to its shareholders, it is required to provide them with physical or electronic share certificates. Share certificates must be issued in the prescribed format, as specified under the Companies Act, 2013. The share certificate should contain essential details such as the company's name, registered office address, unique certificate number, shareholder's name, address, and the number and type of shares issued.

Signing and Execution

Sub-section (3) of Section 46 of the Companies Act, 2013, and Rule 5(2) of the Companies (Share Capital and Debentures) Rules, 2014, pertain to the issue of share certificates by companies in India. Every company, whether public or private, is required to issue share certificates to its shareholders. Share certificates serve as documentary evidence of ownership or investment in the company.

A share certificate is a document issued by a company under its common seal, if applicable (Removed by Companies Amendment act 2015), or signed by-

» two directors and,
» the Company Secretary (if appointed) or one Authorised signatory by Board,

which specifies the shares held by a particular individual. SH-1( share certificate )serves as prima facie evidence of the person's ownership or title to those shares.

Format of shares Certificate shall be in SH-1 under the Companies Act 2013 which shall be-


                                                                        Form No. SH-1

                                                                       Share Certificate

Given under the common seal of the Company this ----------- Day of ---------- (Year)

Director

Secretary/ any other authorized person

Note: No transfer of the Share(s) comprised in the Certificate can be registered unless accompanied by this Certificate.

Q. What is Consideration ?

You know Indian Stamp Act, 1899, does not define the term "Consideration" in relation to the transfer of securities. Under Section 9B (b) of the Act specifies that when a sale, transfer, or reissue of securities is made outside of a stock exchange or depository, the stamp duty is payable by the seller, transferor, or issuer based on the consideration amount mentioned in the instrument. In the context of transferring shares of a private company, the Companies Act, 2013, governs the procedure.

But, it does not explicitly define or provide guidance on the constitution of "Consideration" for the purpose of the transfer. In such cases, parties involved in the transfer may choose to quote the consideration as the face value of the shares, disregarding any free reserves of the company. It is important to consider the tax implications under the Income Tax Act, 1961, while determining the consideration amount.

Q. What are the amendments made in the rates of stamp duty on the issue of share certificates and transfer of shares as per the Stamp Duty Act, 1899?

1. Issue of Share Certificates:

- Pre-Amendment: The stamp duty rate varies from state to state.

- Post-Amendment: The stamp duty rate for all states is fixed at 0.005%.

2. Transfer of Shares in physical form:

- Pre-Amendment: The stamp duty rate was 0.25%.

- Post-Amendment: The stamp duty rate has been reduced to 0.015%.a

These rates reflect the changes made after the amendment to the Stamp Duty Act, 1899.

Conclusion

Companies and shareholders in India to adhere to the regulations related to issuing share certificates and paying stamp duty to ensure compliance with corporate laws and avoid legal consequences. It is suggested by Compliance Calendar LLP to consult with our team of experts and refer to the Companies Act, 2013, and the Indian Stamp Act, 1899, for accurate and up-to-date information regarding share certificates and stamp duty payment in India.