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Post at: Sep 09 2022

Zero coupon, zero principal bond declared securities

In July 2022 Government of India has designated “Zero Coupon Zero Principal Instruments” as securities. 
This is in line with government’s preparation for the creation of a social stock exchange.

About the decision

  • What has happened: Zero Coupon, Zero Principal bond declared as Securities
  • Declared on: 15 July 2022
  • Declared by: Ministry of Finance , Government of India
  • Purpose: Fund raising for Social Stock Exchange

Key Points

  • Bond: A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). 
  • Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.
  • The interest payment (the coupon) is part of the return that bondholders earn for loaning their funds to the issuer. 
  • The interest rate that determines the payment is called the coupon rate.
  • Difference between Regular Bond and Zero Coupon, Zero Principal Bond: A regular bond pays interest to bondholders, while a zero-coupon bond does not issue such interest payments. Instead, zero-coupon bondholders merely receive the face value of the bond when it reaches maturity.

What will happen when they are declared as securities

  • According to the notification, “zero coupon zero principal instruments” have been designated as securities for the purposes of the Securities Contracts (Regulation) Act, 1956.
  • After this these bonds will be governed by rules applied by SEBI on them.
  • Fund raising through these bonds
  • In September 2021, SEBI’s board cleared a framework for SSE for fund raising by social enterprises.
  • Non Profit Organisations(NPOs ) and for-profit social enterprises -- having social intent and impact as their primary goal will be able to list on SSE to raise fund.
  • It has been proposed that eligible NPOs may raise funds through equity, zero coupon zero principal bonds, mutual funds, social impact funds, and development impact bonds.

 

 


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