Stamping out Mumbai's capital market

WITHOUT CONTEMPT

Mumbai has always been proud of being the financial capital of India. It houses the headquarters of the two biggest stock exchanges and, the finance minister has now indicated, there is no room for a third.

However, if things continue the way they are with the Maharashtra Government's approach to stamp duty laws, the rest of India would have cause not to be proud of Mumbai.

The stamp duty is not a transaction tax. It is a duty payable on the creation and execution of certain pre-identified instruments within a specified territory. If an instrument is executed outside the territory, the applicable stamp duty becomes payable when the instrument physically enters the territory.

The Indian Stamp Act applies to the whole of India, but except for certain specific instruments, every state has the constitutional authority to write its own stamp duty laws, and to vary the duty prescribed in the Indian Stamp Act.

A legacy of the British administration, the stamp duty is an anachronism in the capital market. Many vibrant markets do not have such a duty, but since this a duty specifically provided for in the Constitution of India, neither the central government nor any state government has had the political will to abolish it.

One of the instruments on which stamp duty is payable is the "contract note" that stock exchange bye-laws and Sebi regulations require brokers to issue to clients.

This is an important instrument since this is the document that evidences that the broker has executed a transaction, and that the investor has instructed him to do so.

However, if the Maharashtra government has its way, a broker executing his own transaction with his money has to issue a contract note to himself, and ought to, therefore, pay stamp duty on such contract notes.

Worse, even if such a contract note is never written, the Maharashtra government believes that stamp duty is a transaction tax and a duty ought to be paid even in the absence of the instrument.

It is not even a requirement of the Sebi or any stock exchange that a broker has to issue himself a contract note to have a record of proprietary transactions "" and rightly so.

When a transaction is executed on the screen of the stock exchange, the broker has to punch in a client code or his proprietary code, which evidences the nature of the transaction.

Imagine writing a contract giving yourself some rights, with the corresponding obligations being owed by you. But the Maharashtra government is not so sure that this is as plain as plain can be.

There is a very subtle but perverse implication of treating stamp duty as a transaction tax as opposed to a duty payable on specified instruments. It is another matter that the stamp duty laws would have to be re-written to make it a transaction tax.

If the stamp duty was payable on proprietary transactions regardless of the non-existence of contract notes, the members of the two national stock exchanges, who have no presence at all in Maharashtra, would still have to pay duty to the Maharashtra government for undertaking proprietary transactions, only because these exchanges are headquartered in Mumbai and their trading servers are in Maharashtra. In other words, one state government would tax virtually the entire Indian secondary capital market.

Funnily, in an extraordinary measure of candour and user-friendliness, a few months ago, the stamp duty authorities actually issued a clarification that there is no question of stamp duty being applicable on proprietary transactions.

Weeks later, this clarification was withdrawn, and now, stamp duty payments that do not include stamp duty on proprietary transactions are rejected, as being incomplete.

The single biggest measure of stamp duty reform took place in 1996 when Parliament passed the Depositories Act, which took away the need for executing share transfer deeds. However, the duty payable on share transfer deeds is squarely within the jurisdiction of the central government.

Cleaning up the mis-appreciation of stamp duty laws by state governments is a must to make the capital market hospitable for its constituents. One state's administration of stamp duty laws should not be allowed to hold the financial system to ransom.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed are his)