How does Non-stamping of an Agreement & Share Certificates affect your business's legal rights

How does Non-stamping of an Agreement & Share Certificates affect your business's legal rights . In India, stamping agreements is a legal requirement under the Indian Stamp Act, 1899. This act mandates that certain types of documents, such as agreements, deeds, and contracts, need to be executed on stamp paper of appropriate value to be considered valid in India and legally enforceable by courts and parties. In this post, Compliance Calendar highlights important aspects of stamping an agreement and addresses the ramifications of non-stamping of an agreement as well as share certificates on the legal rights of the business.  
Necessity of stamping agreement in Indian law
The Indian Stamp Act, 1899 was enacted to consolidate and amend the law relating to Stamps. 
The legal requirement of stamping agreements has larger implications and advantages. These are -

Evidence the admissibility of a legal document - A duly stamped document is admissible as evidence in courts of law in India.

Fraud prevention - By insisting on stamping documents with appropriate amounts, a legal trail is created that helps prevent fraud and forgery of documents

Source of revenue - Stamp duty levied as a percentage of the transaction value serves as an important source of revenue for the state governments in India.

Section 35 of the Indian Stamp Act, 1899 specifies that no instrument which has not been charged with adequate duty shall be admitted in evidence for any purpose. 
Invalidity of agreements that have no stamp duty 
Being 'adequately stamped' indicates that the required stamp duty for the agreement has been duly paid by either one or all of the parties involved. Various Indian states have their own individual stamp laws, which stipulate the specific stamp duty amounts applicable to different instruments, including agreements, deeds, contracts etc typically calculated based on ad valorem basis. The precise stamp duty amount varies depending on the type and characteristics of the agreement.
How is stamp duty calculated?
A stamp duty is calculated as per the properties value and is usually expressed in a percentage as the total payable amount on ad-valorem basis. India being a quasi federal country, allows state governments to impose their own stamp duty amounts and vary them from time to time.
When does stamp duty become payable?
A stamp duty is payable at the time of execution of a transaction document. However, the duty can be payable at any time before the execution of the document. In India, even online execution of contracts, such as property documents require stamp duty to be payable.
Business Agreements Requiring Payment of Stamp Duty 
Section 3 of the Stamp Act states that every bill of exchange as well as every instrument relating to property situated in India is required to be stamped. In addition, Schedule I contains exemptions for instruments that do not require such stamping.

Registration of a Limited Liability Partnership under the LLP Act, 2008

Execution of Memorandum of Association and Articles of Association

Partnership Agreements

Transfer of shares

Transfer of debentures

Letters of credit, bonds, promissory notes

Sale agreements

Lease agreements

Power of Attorney

Bill of lading

Bonds

Composition Deeds

Mortgage Deeds

Amendments passed by Finance Act, 2019 to the Indian Stamp Act, 1899 
This amendment passed in 2019 aimed to clarify and streamline the process for payment of stamp duty on securities. It introduced the following provisions:

It aligned the definitions of debenture market value and securities to make it uniform with other statutes.

Another important change was that transfer of securities in physical form only was subject to payment of stamp duty. However, this exemption was done away with and now stamp duty is payable even on dematerialised form.

A uniform stamp duty of 0.005% on issuance of debentures and 0.0001% on transfer of debentures has been specified.

Moreover, futures options, currency and interest rate derivatives have also been subject to stamp duty; it also provides that stamp duty in respect of sale of securities will be collected on the date of settlement.

Non stamping of agreement is a curable defect 
Section 35 of the Stamp Act prohibits the court or any judicial authority from acting upon an unstamped document or receiving an unstamped document in evidence. While in some cases, the Supreme Court held that an unstamped document could not be acted upon at all, recent cases affirm that the document is not enforced unless the penalty and deficit stamp duty is paid.
In a recent case law (In Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899 Curative Pet(C) No. 44/2023 In R.P.(C) No. 704/2021 In C.A. No. 1599/2020) decided in December, 2023, the court stated that non-payment or inadequate payment of stamp duty does not render the instrument invalid. Instead, it deems the instrument inadmissible. This distinction was significant, as the ruling emphasized that the Stamp Act does not declare instruments without proper stamping as void. The non-payment of stamp duty was characterized as a curable defect, and stated that the Stamp Act itself provided a structured procedure for rectifying this defect.
Stamp duty on share certificates 
The Companies Act 2013, and the provisions of the Indian Stamp Act, 1899 mandate that a stamp duty has to be paid on share certificates. As per Section 56(4) of the Companies Act, 2013, every company that issues shares with investors and shareholders or employees is required to issue a share certificate within two months of allotment of such shares. The shares certificates have to be stamped within 30 days of issuance of certificates.
The rate of stamp duty for share certificates has been made uniform after the passing of an amendment to the Indian Stamp Act in 2019. For the issue of share certificates, this rate is fixed at 0.005% for all states.

Transfer of Securities (Physical Mode): Stamp duty for transferring shares in physical form is fixed at 0.015% of the total market value of the shares.

Stamp duty on dematerialised shares: Since 2019, a compulsory stamp duty is required to be paid even on dematerialised shares. This brings physical shares at par with dematerialised securities, at 0.015%.

Stamp Duty on Bonus Shares: Stamp duty on bonus shares is levied based on the market value, considering the price or consideration involved in the issuance.

Stamp Duty on ESOP Shares: Stamp duty for shares issued through ESOP (Employee Stock Ownership Plans) is calculated on the exercise price mentioned in the allotment list.

Duplicate Share Certificates: If the original document was duly stamped, no stamp duty is required to issue duplicate share certificates, as it is not considered a case of sale, transfer, or issuance of securities.

Penalty for non-compliance of stamping

In case a company fails to apply for stamping of share certificates within the stipulated time period, a penalty up to 10 times of the stamp duty amount can be levied by the relevant authority. Interest may also become payable for the delay.

Under Section 43, prosecution of any person who has committed an offense against the Stamp Act can also be carried out.

Under Section 62, any person who executes or signs without the instrument being duly stamped, shall be punishable with a fine which may extend to 500. If a share warrant is issued without being duly stamped, the company issuing the same and also every person who at the time when it is issued is the managing director, or secretary, or principal officer of the company shall be punishable with fine which may extend to 500.

Remedying the defect of non-stamping 
Under Section 35 of the Indian Stamp Act, 1899, an insufficiently stamped instrument requires a penalty up to 10 times the amount of proper duty or the deficient portion. 
It is advisable that a party when faced with deficient or missing stamp duty, must procure stamp paper of the adequate amount, despite the fact that transaction is completed or documents may already be executed. Online payment of stamp duty can be done using the government run portals, the Stock Holding Corporation of India Limited that issues e-stamp certificates or via Electronic Secure Bank and Treasury Receipt System (eSBTR) where payment of stamp duty is processed through a bank. 
Documents required for stamping of shares certificates

Application form duly affixed with Rs. 10/- court fee stamp.

Certified copy of Share Certificates

Copy of Form PAS-3/ Copy of SPICe Form Part B

Certified copy of board resolution

Certified copy of PAN of company

Certified copy of Memorandum and Articles of Association

Certified copy of list of existing directors

Certified copy of list of Allottees/Share Certificate Holders

Certified Authority letter of Company Secretary/Chartered Accountant (having a valid ICSI/ICAI membership).

Certain agreements are valid even if stamp duty is not payable

Arbitration agreements - The Supreme Court, with a 3:2 majority has held in M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd, (2023) that even if an arbitration agreement was not stamped, the arbitral clause will not be rendered invalid merely because the arbitration agreement was unstamped. The court held that such an unstamped instrument cannot be accepted as evidence in the court.

Documents that evidence collateral transactions - Under Section 49 of the Registration Act, the proviso allows an unregistered document to be received as evidence of a collateral transaction.

Document in the Corporate Insolvency Resolution Process - Non-stamping of a document does not render the Corporate Insolvency Resolution Process ('CIRP') petition filed to be non-maintainable when there exists other material on record to show that the documents are otherwise accurate.

Admission of proceedings under Criminal Court - The provisions of the Stamp Act are inapplicable to proceedings under the Criminal Courts under the Code of Criminal Procedure, 1898.

FAQs

What are the modes of payment of stamp duty in India?

Stamp duty is usually paid in two forms - by purchasing a physical stamp paper from an authorised merchant. Or, the more convenient way is to get documents e-stamped. The Stock Holding Corporation of India Limited handles the e-stamping operations in India.

Is stamp duty required to be paid on e-contracts in India?

Yes. The authenticity of electronic contracts is recognised only on the payment of appropriate stamp duty.

In India, stamping agreements is a legal requirement under the Indian Stamp Act, 1899. This act mandates that certain types of documents, such as agreements, deeds, and contracts, need to be executed on stamp paper of appropriate value to be considered valid in India and legally enforceable by courts and parties. In this post, Compliance Calendar highlights important aspects of stamping an agreement and addresses the ramifications of non-stamping of an agreement as well as share certificates on the legal rights of the business.

Necessity of stamping agreement in Indian law

The Indian Stamp Act, 1899 was enacted to consolidate and amend the law relating to Stamps.

The legal requirement of stamping agreements has larger implications and advantages. These are -

Evidence the admissibility of a legal document - A duly stamped document is admissible as evidence in courts of law in India.
Fraud prevention - By insisting on stamping documents with appropriate amounts, a legal trail is created that helps prevent fraud and forgery of documents
Source of revenue - Stamp duty levied as a percentage of the transaction value serves as an important source of revenue for the state governments in India.

Section 35 of the Indian Stamp Act, 1899 specifies that no instrument which has not been charged with adequate duty shall be admitted in evidence for any purpose.

Invalidity of agreements that have no stamp duty

Being 'adequately stamped' indicates that the required stamp duty for the agreement has been duly paid by either one or all of the parties involved. Various Indian states have their own individual stamp laws, which stipulate the specific stamp duty amounts applicable to different instruments, including agreements, deeds, contracts etc typically calculated based on ad valorem basis. The precise stamp duty amount varies depending on the type and characteristics of the agreement.

How is stamp duty calculated?

A stamp duty is calculated as per the properties value and is usually expressed in a percentage as the total payable amount on ad-valorem basis. India being a quasi federal country, allows state governments to impose their own stamp duty amounts and vary them from time to time.

When does stamp duty become payable?

A stamp duty is payable at the time of execution of a transaction document. However, the duty can be payable at any time before the execution of the document. In India, even online execution of contracts, such as property documents require stamp duty to be payable.

Business Agreements Requiring Payment of Stamp Duty

Section 3 of the Stamp Act states that every bill of exchange as well as every instrument relating to property situated in India is required to be stamped. In addition, Schedule I contains exemptions for instruments that do not require such stamping.

Registration of a Limited Liability Partnership under the LLP Act, 2008
Execution of Memorandum of Association and Articles of Association
Partnership Agreements
Transfer of shares
Transfer of debentures
Letters of credit, bonds, promissory notes
Sale agreements
Lease agreements
Power of Attorney
Bill of lading
Bonds
Composition Deeds
Mortgage Deeds

Amendments passed by Finance Act, 2019 to the Indian Stamp Act, 1899

This amendment passed in 2019 aimed to clarify and streamline the process for payment of stamp duty on securities. It introduced the following provisions:

It aligned the definitions of debenture market value and securities to make it uniform with other statutes.
Another important change was that transfer of securities in physical form only was subject to payment of stamp duty. However, this exemption was done away with and now stamp duty is payable even on dematerialised form.
A uniform stamp duty of 0.005% on issuance of debentures and 0.0001% on transfer of debentures has been specified.
Moreover, futures options, currency and interest rate derivatives have also been subject to stamp duty; it also provides that stamp duty in respect of sale of securities will be collected on the date of settlement.

Non stamping of agreement is a curable defect

Section 35 of the Stamp Act prohibits the court or any judicial authority from acting upon an unstamped document or receiving an unstamped document in evidence. While in some cases, the Supreme Court held that an unstamped document could not be acted upon at all, recent cases affirm that the document is not enforced unless the penalty and deficit stamp duty is paid.

In a recent case law (In Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899 Curative Pet(C) No. 44/2023 In R.P.(C) No. 704/2021 In C.A. No. 1599/2020) decided in December, 2023, the court stated that non-payment or inadequate payment of stamp duty does not render the instrument invalid. Instead, it deems the instrument inadmissible. This distinction was significant, as the ruling emphasized that the Stamp Act does not declare instruments without proper stamping as void. The non-payment of stamp duty was characterized as a curable defect, and stated that the Stamp Act itself provided a structured procedure for rectifying this defect.

Stamp duty on share certificates

The Companies Act 2013, and the provisions of the Indian Stamp Act, 1899 mandate that a stamp duty has to be paid on share certificates. As per Section 56(4) of the Companies Act, 2013, every company that issues shares with investors and shareholders or employees is required to issue a share certificate within two months of allotment of such shares. The shares certificates have to be stamped within 30 days of issuance of certificates.

The rate of stamp duty for share certificates has been made uniform after the passing of an amendment to the Indian Stamp Act in 2019. For the issue of share certificates, this rate is fixed at 0.005% for all states.

Transfer of Securities (Physical Mode): Stamp duty for transferring shares in physical form is fixed at 0.015% of the total market value of the shares.
Stamp duty on dematerialised shares: Since 2019, a compulsory stamp duty is required to be paid even on dematerialised shares. This brings physical shares at par with dematerialised securities, at 0.015%.
Stamp Duty on Bonus Shares: Stamp duty on bonus shares is levied based on the market value, considering the price or consideration involved in the issuance.
Stamp Duty on ESOP Shares: Stamp duty for shares issued through ESOP (Employee Stock Ownership Plans) is calculated on the exercise price mentioned in the allotment list.
Duplicate Share Certificates: If the original document was duly stamped, no stamp duty is required to issue duplicate share certificates, as it is not considered a case of sale, transfer, or issuance of securities.

Penalty for non-compliance of stamping

In case a company fails to apply for stamping of share certificates within the stipulated time period, a penalty up to 10 times of the stamp duty amount can be levied by the relevant authority. Interest may also become payable for the delay.

Under Section 43, prosecution of any person who has committed an offense against the Stamp Act can also be carried out.
Under Section 62, any person who executes or signs without the instrument being duly stamped, shall be punishable with a fine which may extend to 500. If a share warrant is issued without being duly stamped, the company issuing the same and also every person who at the time when it is issued is the managing director, or secretary, or principal officer of the company shall be punishable with fine which may extend to 500.

Remedying the defect of non-stamping

Under Section 35 of the Indian Stamp Act, 1899, an insufficiently stamped instrument requires a penalty up to 10 times the amount of proper duty or the deficient portion.

It is advisable that a party when faced with deficient or missing stamp duty, must procure stamp paper of the adequate amount, despite the fact that transaction is completed or documents may already be executed. Online payment of stamp duty can be done using the government run portals, the Stock Holding Corporation of India Limited that issues e-stamp certificates or via Electronic Secure Bank and Treasury Receipt System (eSBTR) where payment of stamp duty is processed through a bank.

Documents required for stamping of shares certificates

Application form duly affixed with Rs. 10/- court fee stamp.
Certified copy of Share Certificates
Copy of Form PAS-3/ Copy of SPICe Form Part B
Certified copy of board resolution
Certified copy of PAN of company
Certified copy of Memorandum and Articles of Association
Certified copy of list of existing directors
Certified copy of list of Allottees/Share Certificate Holders
Certified Authority letter of Company Secretary/Chartered Accountant (having a valid ICSI/ICAI membership).

Certain agreements are valid even if stamp duty is not payable

Arbitration agreements - The Supreme Court, with a 3:2 majority has held in M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd, (2023) that even if an arbitration agreement was not stamped, the arbitral clause will not be rendered invalid merely because the arbitration agreement was unstamped. The court held that such an unstamped instrument cannot be accepted as evidence in the court.
Documents that evidence collateral transactions - Under Section 49 of the Registration Act, the proviso allows an unregistered document to be received as evidence of a collateral transaction.
Document in the Corporate Insolvency Resolution Process - Non-stamping of a document does not render the Corporate Insolvency Resolution Process ('CIRP') petition filed to be non-maintainable when there exists other material on record to show that the documents are otherwise accurate.
Admission of proceedings under Criminal Court - The provisions of the Stamp Act are inapplicable to proceedings under the Criminal Courts under the Code of Criminal Procedure, 1898.