The Finance Ministry has declared zero coupon zero principal instruments (ZCZP) as securities. Experts say this will help many organisations including corporates to utilise their fund marked for social responsibility and also help non-profit organisations to get funds in a more transparent manner. In simple words, neither any interest is paid nor principal is repaid under ZCZP.
A gazette notification issued by the ministry said: “Zero Coupon-Zero Principal instrument means an instrument issued by a not-for-profit organisation which shall be registered with the social stock exchange (SSE) segment of a recognised stock exchange in accordance with the regulations made by the Securities and Exchange Board of India (SEBI).”
The notification also declared the inclusion of ZCZP in the list of securities under Securities Contracts (Regulation) Act, 1956. As on date, this list included shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities, derivative, units or any other instrument issued by any collective investment scheme, security receipt, mutual fund units (excluding ULIPs), units issued by any pooled investment vehicle and government securities. These securities can be traded on a recognised stock exchange and such trading can be regulated by SEBI.
Dhirendra Kumar, CEO of Value Research, said: “This move is certainly going to benefit both — one who wants to donate and one who wants to raise money for social causes. Take the example of a corporate which is mandated to use part of profit under Corporate Social Responsibility (CSR), it will get an instrument to invest but not for return.”
The new notification is a follow up to Finance Minister Nirmala Sitharaman’s announcement in the FY20 Budget. “It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion. I propose to initiate steps towards creating an electronic fund raising platform — a social stock exchange — under the regulatory ambit of SEBI for listing social enterprises and voluntary organisations working for the realisation of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund,” she had said.
To implement this, SEBI formed a working group which recommended that ZCZP bonds be listed on the SSE. They will carry a tenure equal to the duration of the project that is being funded, and at tenure, they will be written off the investee’s books. Such bond is particularly well suited to investors who are looking to create social impact but do not wish to have their funds returned to them.
However, as the group said, such bonds are not without risk, as there is no guarantee that the social impact that an NPO (Non-Profit Organisation) is promising will in fact be created. Accordingly, investors will be keen to channel funds only to credible and legitimate NPOs, which the SSE will ensure by requiring beneficiary NPOs to report on social impact in a standardised format. Furthermore, the group recommended investors in ZCZP bonds may also be awarded a tax benefit to incentivise their participation in this instrument.
Accordingly, last September, the SEBI board approved a framework for SSE through which ZCZP can be issued. It has been proposed that the minimum issue size of ZCZP will be ₹1 crore while the minimum application size shall be ₹2 lakh.