Revamping Rules For Creation Of Charge On Immoveable Property

This article touches upon varying procedural formalities and stamp duty implications across States in India in relation to creation of equitable mortgage or charge on immoveable property, the impact thereof on high value financing arrangements and the much-needed ease in the underlying processes that Registration Bill, 2025 (in its current form) is expected to bring in this regard.

Common form of creating mortgage/ charge over an immoveable property

In the Indian context, the most common methods of creating mortgage/ charge over an immoveable property in financing arrangements is either:

• By way of an equitable mortgage by deposit of title deeds under section 58 (f) of the Transfer of Property Act, 1882); or
• By way of an instrument (irrespective of the nomenclature) where immoveable property of one person is by act of parties or operation of law made security for the payment of money to the lender thus creating charge on such immoveable property in favor of the lender in terms of section 100 of the Transfer of Property Act, 1882. A charge so created, is akin to simple mortgage.

The format specifically records the intent of the obligor to create security and the lenders' right to sell the property mortgaged or as the case may be, charged in its favour, to recover the dues consequent to default in repayment of the loan by the borrower.

Variation in procedural formalities across states

The format of documents required to be executed and procedural formalities for creating mortgage by deposit of Title Deeds or charge on immoveable property, varies significantly across States - common structure being that of a Memorandum of Deposit of Title Deeds; Letter/ Memorandum evidencing deposit of title deeds or a Memorandum of Entry executed by the lender/ security trustee coupled with declaration by the mortgagor conveying the intent to deposit the title deeds pertaining to the immoveable property for the purposes of inter alia, securing credit facilities availed by such mortgagor or as the case may be, the principal borrower.

While the basic legal framework for mortgages is provided by the Transfer of Property Act, 1882, and is applicable to the whole of India, States have authority to lay down by law, the stamp duty and registration formalities to be complied as regards an instrument creating mortgage/ security interest on immoveable property situated within that State. Some of the broad parameters where significant variation exists across States are:

1. Need for Compulsory registration and/or notification

The Hon'ble Supreme Court in Suraj Lamp & Industries (P) Ltd. (2) through Director v. State of Haryana and Another [reported in (2012) 1 SCC 656] emphasized on the need for registration of documents so as to give publicity and public exposure to various transactions in respect of immoveable properties and enable people to find out whether a particular property is encumbered and or not and who is or are the person/s presently having right, title, and interest in the property.

Some of the States like Gujarat; Maharashtra and Tamil Nadu have made registration of equitable mortgages compulsory; Rajasthan requires registration of the Memorandum of Entry (MOE); Madhya Pradesh requires notice of intimation to the jurisdictional sub-registrar. Thus, States have stipulated their own guidelines regarding registration and/or notification.

2. Stamp duty computation - value of property recovered vs. amount secured

Inevitably, the document creating mortgage or charge on immoveable property further grants to the mortgagee, an enforceable security interest and right to foreclose, to take pos­session, or to sell the property in the event of default.

The enforcement of a mortgage consequent to an event of default, can at best, fetch the lenders (and only to the extent of/ in proportion to their respective participation under the credit arrangement) the then value of the mortgaged property and may have no relationship with the total loan amount being secured by the said mortgage.

In view of what is stated above, the computation of stamp duty ad valorem on the "amount secured" defies logic. More so, when the mortgaged property is only a part of the overall security stipulation emanating from credit exposure risk with a clear understanding and assessment (in majority of the cases) that the value of the said property may not adequately cover the credit exposure.

3. Per lender theory

The Hon'ble Supreme Court in Chief Controlling Revenue Authority Vs Coastal Gujarat Power Ltd (Civil Appeal No. 6054 of 2015) ruled that a single mortgage document for a consortium of lenders doesn't constitute a single transaction for stamp duty; it involves "distinct matters" requiring duty on each such transaction/ distinct matter as referred in the Gujarat Stamp Act.

This led to yet another round of amendments in State laws (initially in the state of Gujarat and Maharashtra and the trend still continues). Pursuant to this judgement, mortgages created for the benefit of consortium of lenders became subject to stamp duty on per lender basis (each being beneficiary to the said security) and was seen as a mode of generating higher revenue from the borrower. The effect of this move was sought to be contained by prescribing cap on stamp duty payable in case of consortium arrangements - the maximum being INR 75 lakhs in the state of Gujarat.

4. Cost implications in case of consortium financing and restructuring

It is worthwhile to mention that in case of consortium financing, any change in the overall credit exposure and/or composition of the lending group etc., requires extension of existing charges and consequently the process calls for yet another round of stamp duty payment on instrument creating mortgage. The stamp duty payable (even at capped rates) for creation and subsequent extension of mortgages to comply with the security stipulation is indeed sunk cost. The statutory prescription appears even more regretful in cases where restructuring of the credit facilities is sought to be implemented by a consortium of lenders - wherein on one side concessions are being passed on by the lenders in an attempt to revive the distressed asset and on the other side significant amount (often funded / facilitated by the reliefs rolled out by the lenders) is spent on security perfection, major thereof being towards stamp duty. In some instances, even at capped rates of stamp duty, costs associated with creating and extending mortgage/ charge forms significant portion of or exceeds the value of the mortgaged property.

Expected changes with the promulgation of the Registration Bill, 2025

The vision document of the Registration Bill 2025 (which upon enactment would replace the Registration Act, 1908) states that it has been designed to provide a harmonized and enabling framework to support secure, efficient and citizen-centric registration practices across the country in due consideration of the growing use of technology, evolving socio-economic practices and increasing reliance on registered documents. Amongst others, the Registration Bill, 2025, upon its promulgation in the draft form (as circulated while seeking public comments thereon), would expand the list of documents requiring compulsory registration by including agreements to sell, powers of attorney, sale certificates issued by competent authorities, equitable mortgage arrangements and certain instruments based on court orders and further procure transparent procedures by encouraging simplification without compromising on legal certainty or procedural safeguards.

Section 14 (3) of the Registration Bill, 2025 which reads as follows, is likely to bring in the much-needed uniformity and ease out the procedural rigors across States:

All banks, financial institutions, and other creditors, granting loans on the basis of mortgage by deposit of title deeds must file a copy of the title deed with the registering officer within the local limits of whose jurisdiction the whole or any part of the property so mortgaged is situated and notify such officer about such mortgages in such form and manner as may be prescribed.

Conclusion.... uniformity as to processes and rationality as to underlying costs

Stamp duty in India formed part of state subject with the intent of empowering states to generate independent revenue for local development, infrastructure, and administration. This rationale has served its purpose (with more avenues of revenue generation being now available with the States) and States cannot be driven by narrow and short-term objective of meeting their revenue targets - of which stamp duty forms a major proportion, by conveniently ignoring the need to incentivize procurement of credit for industrialization and economic growth.

The 4 Cs of Credit which has thus far been the framework lenders use to assess a borrower's creditworthiness and evaluate the risk of lending money by examining credit history/reputation (Character), ability to repay (Capacity), financial resources (Capital), and assets securing the loan (Collateral), needs to further be commercially prudent as regards mortgages/ costs associated with security creation and to this effect the lending fraternity as a group should endeavor to procure consistency and cost effectiveness by active engagement with other stakeholders.

While much of the procedural aspects would stand streamlined as we witness the regulatory changes with Registration Bill, 2025 becoming an Act, in the interim it is imperative for the stakeholders to come together with a common objective of ensuring rationalization of the stamp duty on instruments creating charge generally and specifically, on mortgages to be created for consortium arrangements involving high value credit facilities to entities having operations and chargeable assets across states. One way could be to align the processes and extend the scope of CERSAI registration [which currently is a complete registry in itself encompassing security interest of immoveable, movable, intangible properties and assignment of receivables - may be by providing for a slab rate of stamp duty to be collected at the time of such registration (payment gateway to ensure the duties get credited to the exchequer of respective states)] and real time information sharing between such portal and registration and stamps' authorities of the respective States to reflect charge on the immoveable properties.

Statutory prescriptions should be equitable to command compliance rather than being onerous enough to incite circumvention.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.