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Zero Coupon Zero Principal Instrument declared Security

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Government of India on July 15, 2022 declared โ€œZero Coupon Zero Principal instrumentsโ€ as “securities” under Securities Contracts (Regulation) Act, 1956.

Zero Coupon Zero Principal bonds (ZCZPs) are novel financial instruments which are issued by non-profit organizations (NPOs) to raise funds for specific social development projects. These bonds do have a zero coupon and no principal payment at maturity. However, ZCZPs allow investors a sense of fulfillment by allowing them to help in the creation of social impact. Further, issuance of these bonds increases accountability of NPOs. This increased accountability comes from additional disclosures they have to make before and after issuance of these bonds.

Government of India in its notification provides that these bonds can be issued by NPOs which shall be registered with the Social Stock Exchange (SSE) segment.

The concept of SSE was first introduced by the Ministry of Finance in the budget of 2019-20. SSE is proposed to be a separate segment under the existing stock exchanges through which for-profit social enterprises and NPOs can raise capital as equity, debt or as units like a mutual fund.

While detailed regulations on SSE are still awaited from SEBI, SEBI has issued a framework for SSE. Moreover, the declaration of ZCZP as securities are an important step in filling gaps in principle legislation and to allow NPOs to issue them.

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