Loan documentation
Stamp (Amendment) Act, 2011 makes loans costlier in J&K
UPON approval for a bank loan, be it a small or big business loan, consumer loan, housing loan or a personal loan, you will typically be asked to sign several documents, including a loan agreement, a promissory note, some kind of personal guarantee, a mortgage deed wherever applicable, etc. after executing the said documents, the loan is disbursed in your favour.
 So, it’s the documentation which is one of the most important elements of the lending operation. For realization of the loan amount together with the other dues and repayable amount, the document taken as security, from the borrower, or/and, the guarantor, for repayment of loan amount together with the other dues, is the main basis of the claim of the banker. Thus realization of the bank dues depends to a large extent upon the precision and completeness of the documents obtained from the borrower.
 In the present context of commercial transactions, a document is therefore, the basis of commercial law.  The application received from the borrower, and the other written agreements executed by the borrower and guarantor, in connection with a particular loan transaction, constitute documents. So, this process of obtaining proper documents and completion of the necessary formalities connected therewith is known as Documentation.
 Let us first understand why these documents are obtained? I have come across several incidents where a government employee applied for a loan and showed resistance to executive these documents on the plea that his salary is routed through the bank and exonerates him from executing the documents. But merely getting his salary from the bank doesn’t absolve him to execute loan documents. To get the loan disbursed, it’s imperative to go for documentation. The documents are necessary in the context of identification of the borrower, the security and to have a written evidence of the transactions of lending made by the bank. Documentation also ensures due repayment of the loan by the borrower/or guarantor and entitles the bank to take legal steps for recovery of the loan, in the event of non-payment by the borrower/or guarantor and to create a valid and effective security in favour of the bank and to create charge on security.
 In the absence of a document capable of being legally enforceable, the bank would find it hard to prove and establish before a court of law that the amount was lent and the same has not been repaid.
 In order to make the document legally valid and enforceable, the precautions to be taken by the bank, are mainly relating to the execution of a document and the period of limitation available in case of a particular document. And it’s here the stamping of the documents becomes essential. Thus, after obtaining the loan, borrowers have to executive certain documents as prescribed by the bank to secure the loan and for this they have to bear the stamp duty. However, the amount of stamp duty on documents vary from state to state.
 There are several questions with regard to stamp duty in common man’s mind. First, what are the instruments which are chargeable to stamp duty? Every document by which any right or liability, is, or purported to be created, transferred, limited, extended, extinguished or recorded [section 2(17) of Indian Stamp Act] is chargeable to stamp duty. The list includes all usual instruments like affidavit, lease, memorandum and articles of company, bill of exchange, bond, mortgage, conveyance, receipt, debenture, share, insurance policy, partnership deed, proxy, shares etc.
 Second, how is this stamp duty paid? Normally these are either general stamp papers or adhesive/ special adhesive stamps.  Generally, in normal documents like hypothecation or pledge both kinds can be used, but special adhesive stamps are affixed only by the Stamp Office and cancelled by them before execution.  A promissory note bears a revenue stamp.  For bills of exchange and share transfers there are different kinds of special adhesive stamps.  However, kinds of stamps differ in different states in accordance with the prevalent rules.
 Even as the basic purpose of stamp duty is to raise revenue to Government, over a period of time the stamped document has obtained so much value that a ‘stamped document’ is considered much more authentic and reliable than an un-stamped document. State Government has powers to fix stamp duties on all documents except bill of exchange, cheques etc. Rates prescribed by State Government will prevail in that State. State Government can make law for other aspects of stamp duty also (i.e. matters other than quantum of duty).
 Meanwhile, J&K Government has enforced several hundred times hike in stamp duty. Consequent upon the passing of Stamp (Amendment) Act, 2011 by the J&K State Legislature and having received the assent from the Governor, the amended Stamp Act has come into force from the date of its publication in the Government Gazette on 25th April 2011. Accordingly, Stamp Duty payable on the documents commonly used in the banks and financial institutions and executed within the state of J&K has gone up considerably. The hike has a direct impact on the borrowers as they have to pocket more towards stamp duty. Notably, by virtue of this amendment, J&K government shall be charging more stamp duty than what is charged in Maharashtra.
 Take the case of loan agreement, letter of continuity, letter of undertaking or letter of authority, on these types of documents, the borrowers were earlier charged a stamp duty of Rs.2. Now the borrower has to pay Rs.100. Earlier documents relating to agreement relating to Pawn, pledge or hypothecation of moveable property by way of security for repayment of money advanced or to be advanced by way of loan or any existing or future debt were charged a stamp duty of just Rs.20. Now as per the amendment in the stamp duty act, the borrower has to pay 0.50% of the loan amount secured subject to maximum of Rs.5 lacs. This means that for a loan of Rs.one lac, the borrower has to pay a stamp duty of Rs.500. In other words, as against previous duty of Rs.20, the borrower has to pay Rs.480 extra, which is a huge burden.
 Prior to the amendment, no stamp duty was charged in case of documents like agreement/ memorandum/ letter relating to deposit of title deeds of instrument in respect of any immovable property where such deposit has been made by way of security for repayment of money, advanced or to be advanced by way of loan or any existing or future debt. But now, the stamp duty of 0.25% of the amount secured by such deed has been imposed. This means, for example, a loan amount of Rs.10 lacs would attract stamp duty of Rs.2500, which was not to be paid prior to the amendment.
 Letter of guarantee/ deed of guarantee or counter guarantee will now attract stamp duty of Rs.500 as against Rs.40. Irrevocable power of attorney (general/special was charged Rs.75 and the amendment has raised it to Rs.100.
 Partnership deeds too have witnessed huge hike in stamp duty. As against Rs.50, these will be now charged at Rs.1000. If there is any document seeking dissolution of partnership or retirement of partner, a stamp duty worth Rs.500 shall be charged. Earlier it was just Rs.40. Indemnity/ surety bonds will now bear a stamp duty of Rs.500 as against the earlier duty of Rs.40.
 In case of deed of mortgage, 0.50% of the loan amount secured by such deed subject to a maximum of Rs 10 lacs shall be charged as stamp duty in case of primary security. If it’s collateral security, the stamp duty would be Rs.500. However deed of mortgage whether primary of collateral security in respect of SSI units registered with the concerned DICs has been exempted from stamp duty. Also memorandum/ letter for deposit of title deeds/ deed of mortgage in respect of housing loans have been exempted provided the loanee/ borrower falls under lower/middle income group.
 With the hike in stamp duty, the loans have become costlier. For example, prior to the amendment documentation related to personal consumption loan would cost approximately Rs.250 including stamp duty. Following the hike in stamp duty, the borrower has to pay Rs. 700 to Rs. 1000 as documentation charges.

(The views are of the author & not the institution he works for.  Feedback:  sajjadbazaz@greaterkashmir.com)

Lastupdate on : Sun, 12 Jun 2011 21:30:00 Makkah time
Lastupdate on : Sun, 12 Jun 2011 18:30:00 GMT
Lastupdate on : Mon, 13 Jun 2011 00:00:00 IST