Context: Recently, the Finance Ministry has declared zero coupon zero principal instruments (ZCZP) as securities under Securities Contracts (Regulation) Act, 1956.

Zero coupon zero principal instrument

• Zero coupon zero principal instrument means an instrument issued by a Not-for-Profit Organisation (NPO) which will be registered with the social stock exchange segment of a recognised stock exchange.

• It means, neither any interest is paid nor principal is repaid under ZCZP.

• These instruments will be governed by rules made by the Securities and Exchange Board of India (SEBI).

Fund Raising: Eligible NPOs may raise funds through-

• equity,

• zero coupon zero principal bonds,

• mutual funds,

• social impact funds, and

• development impact bonds.

NPOs keen for raising funds on the SSE will required to be registered with the exchange.

Zero Coupon Bonds

• A zero-coupon bond is a debt security instrument that does not pay interest.

• Zero-coupon bonds trade at deep discounts, offering full face value (par) profits at maturity.

• The difference between the purchase price of a zero-coupon bond and the par value indicates the investor's return.

The price of a zero-coupon bond can be calculated as:

• Price = M ÷ (1 + r)n  where:

• M = Maturity value or face value of the bond

• r = required rate of interest

• n = number of years until maturity

Zero Coupon Bonds are generally issued by government, private & public corporates.