In a significant decision with far-reaching consequences for the financial and insolvency ecosystem, the Kerala High Court (“High Court”) in J.C. Flowers Asset Reconstruction Pvt. Ltd. v. State of Kerala adjudicated upon the levy of stamp duty on assignment agreements executed under Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). The High Court’s reasoning, while doctrinally rooted in statutory interpretation, leaves asset reconstruction companies (ARCs) operating in legal ambiguity, trapped in a tug-of-war between central legislative intent and state fiscal prerogatives.

Background

The petitioner, J.C. Flowers Asset Reconstruction Private Limited, an ARC registered with the Reserve Bank of India, had entered into two asset reconstruction agreements. Both agreements, executed on a stamp paper valued at Rs. 1,00,000/-, were in pursuance of Section 5(1)(b) of the SARFAESI Act, which authorizes ARCs to acquire financial assets from banks or financial institutions.

Relying on the express statutory exemption under Section 5(1A) of the SARFAESI Act, read with Section 8F of the Indian Stamp Act, 1899 (“Stamp Act”), the petitioner voluntarily submitted the documents for registration while paying a capped stamp duty and registration fee in line with notification G.O.(Ms.) No. 9/2010/TD dated 13.01.2010 (“Notification”), which sets a ceiling of Rs. 1,00,000/- on stamp duty and Rs. 25,000/- on registration fees. The registration authorities, however, refused to register the documents, asserting that the agreements were subject to full ad valorem duty as a conveyance under Article 21 of the Kerala Stamp Act, 1959 (“Kerala Stamp Act”), at the steep rate of 8% of the consideration. Aggrieved by this, the petitioner approached the High Court seeking directions to enforce the statutory exemption and register the assignment agreements without imposition of state-level ad valorem duty.

The Mismatched Intersection of National Policy and State Fiscal Laws

The legal issue at the heart of the case was whether assignment agreements executed by ARCs under Section 5(1)(b) of the SARFAESI Act are exempted from state-imposed stamp duty under the Kerala Stamp Act considering the central exemption granted under Section 5(1A) of SARFAESI read with Section 8F of the Stamp Act.

Section 5(1A) of the SARFAESI Act, introduced via the 2016 amendment on 01.09.2016, explicitly exempts any document executed by a bank or financial institution in favour of an ARC, so long as the transfer is for asset reconstruction or securitisation, from levy of stamp duty. This is further reinforced by Section 8F of the Stamp Act, which, via a non obstante clause, states that any agreement for transfer of financial assets to ARCs shall “not be liable to stamp duty under this Act or any other law for the time being force.” On a plain reading, the legislative intent is unequivocal, the transaction is to be exempt from stamp duty, thereby easing the transactional burden on ARCs.

However, the High Court interpreted this exemption, holding that it applies only to the Stamp Act and not to the Kerala Stamp Act. The Kerala Stamp Act, the High Court reasoned, was a valid enactment under the State’s legislative powers arising from Entry 63 of List II (state list) and Entry 44 of List III (concurrent list) of the Seventh Schedule to the Constitution.

The consequence of this interpretation is both legislative and constitutional in nature. Parliament, exercising its legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution, originally enacted the SARFAESI Act to streamline asset resolution through ARCs. In 2016, it amended the SARFAESI Act to introduce Section 5(1A), which, when read with the concurrently inserted Section 8F of the Stamp Act, exempted the transfer of financial assets to ARCs from stamp duty under the central enactment. This exemption was clearly intended to reduce transaction costs and promote efficient debt recovery. However, this legislative intent is undermined by the continued imposition of stamp duty under state laws, such as the Kerala Stamp Act, which operate independently of the Stamp Act and are traceable to Entry 63 of List II and Entry 44 of List III of the Seventh Schedule to the Constitution.

The outcome is a fragmented and inconsistent legal landscape where the economic objectives of a central law are obstructed by state fiscal legislation. While the state’s competence to legislate on stamp duty is not in question, the lack of harmonisation between central and state regimes creates legal uncertainty and undermines the functional effectiveness of the SARFAESI framework. A purposive interpretation of the exemption provisions, aligned with the broader goals of banking sector reform, would have better served the financial sector, and respected the legislative intent behind the 2016 amendment of the SARFAESI Act.

Judicial Conservatism Over Legislative Purpose

While the High Court correctly reiterates that tax exemptions must be strictly construed, it misses the broader policy imperative underpinning Section 5(1A) of the SARFAESI Act. The exemption is not a fiscal concession in traditional sense but a legislative tool to streamline securitisation and reduce systemic delays and costs in asset recovery. ARCs are at the forefront of India’s debt resolution machinery under the Insolvency and Bankruptcy Code and SARFAESI frameworks. Imposing ad valorem duties on assignment of distressed assets renders the process financially inefficient, undermining the very legislative purpose the SARFAESI Act seeks to achieve.

Moreover, Section 5(1A) of the SARFAESI Act begins with a non obstante clause, reflecting Parliament’s unequivocal intent to ensure that the exemption from stamp duty takes precedence over any inconsistent legal provisions. This clause, when read considering the SARFAESI Act’s foundation under Entry 45 of List I of the Seventh Schedule of the Constitution, affirms that central legislation in the domain of banking is intended to operate unhindered by conflicting state laws. However, the judgment stops short of examining the legal consequence of this overriding clause in the federal structure, particularly the principle that, where a valid law enacted under List I of the Seventh Schedule of the Constitution occupies the field, state laws under List II of the Seventh Schedule of the Constitution must yield to the extent of any operational inconsistency. The absence of such an analysis diminishes the clarity needed to reconcile overlapping legislative domains in the context of financial sector reforms.

Limited Relief Within a Fragmented Framework

The High Court did offer partial relief by directing the registration authorities to register the assignment agreements by extending the benefit of the Notification, which caps duty and fees. However, this relief is challenging. Firstly, the Notification itself was intended to apply only to Asset Reconstruction Company (India) Limited, a specific entity, and was never extended either legislatively or administratively to other ARCs. Second, it lacks statutory force, having not been notified under Section 9 of the Kerala Stamp Act, which is the prescribed route for exemptions. By relying on an ad-hoc executive order, though the High Court effectively legitimizes unequal treatment, however, adds to the regulatory uncertainty in the sector.

Instead of harmonizing the legislative framework, the judgment entrenches a piecemeal solution that is unlikely to withstand future legal scrutiny, especially if challenged by competing ARCs or contested by revenue authorities in other states.

A Complicated Situation Approved by the Judiciary

This judgment, though well-intentioned in granting relief, stops short of addressing the root cause of the legal confusion. In doing so, it underscores a larger systemic issue, India’s fragmented stamp duty regime, where state-level fiscal policies can nullify or dilute the objectives of central economic legislation.

The SARFAESI Act and the Stamp Act, through Section 5(1A) and Section 8F respectively, seek to establish a cohesive national framework aimed at facilitating the transfer of distressed assets by exempting such transactions from stamp duty under central law. However, the High Court’s narrow reading of these provisions and its reluctance to engage with the broader constitutional implications of overlapping legislative fields has diluted the effectiveness of this reform. By upholding the applicability of state level stamp duty in parallel, the judgment paves the way for continued legal fragmentation, allowing other states to similarly impose fiscal barriers on securitisation transactions. This undermines the uniformity envisioned by Parliament and frustrates the broader objective of strengthening the asset reconstruction and financial resolution ecosystem across the country.

For the sector to thrive, a clear and uniform exemption for ARC transactions must be achieved either through a central legislative override applicable to state stamp laws or through coordinated efforts between the centre and the states, such as a model legislative framework or inter-state consensus. Without such alignment, ARCs will continue to operate in an environment of legal uncertainty, bearing the cost, both financial and operational, of a fragmented federal structure that remains unresolved by the courts.

Authors of the Article:

Mr. Saheb Singh Chadha
Associate Partner

and

Mr. Krishna Ramanathan
Associate

The views expressed above are personal and do not represent those of Vaish Associates Advocates. They do not constitute legal advice.

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