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zero-coupon, zero-principal and social stock exchange: – Challenges that lie ahead

The government through its gazette notification on 15 July 2022 accredited zero-coupon, zero-principal instruments as security within the term of the Securities Contract (Regulation) Act 1956.To


The government through its gazette notification on 15 July 2022 accredited zero-coupon, zero-principal instruments as security within the term of the Securities Contract (Regulation) Act 1956.To understand the concept, it is better to state that the zero-coupon, zero-principle (Z.C.Z.P) is a kind of bond issued by the Non-profit (hereinafter N.P.O) or for-profit social enterprise organisation to raise funds through the recently inaugurated social stock exchange, a section of the recognised stock exchanges. These instruments are like debt bonds that are essentially devoid of any return in terms of interest upon reaching maturity. However, the only return the investor can expect is the result of the social effects that a project has.

Before this notification, the instrument issued by the N.P.Os did not qualify as security within the terms of the Securities Contract (Regulation) Act of 1956. This along with the reasons such as the nature of their institution i.e. non-profit making and non-availability of their records concerning the realisation of their project undertaken and their social effects works as impediments to allowing them to access the funding and importantly investors thus restricting the capitalisation of the societal improvement potential that these N.P.Os possess. As succour, the government passed, as mentioned, a notification in order to do away with the impediments thereby easing the path to having institutional funds. In light of this, this article attempted to analyse the nature and scope of the said instrument and tried to compare the Indian scenario with other jurisdictions. And at last, the post highlighted the challenges relating to this instrument and possible measures to overcome those challenges. 

zero-coupon, zero-principal, What is it?

N.P.Os or for-profit social enterprises that depict their social impacts and have the primary intent to work for the betterment of society are allowed to access the Social Stock Exchange in order to raise funds through this instrument from the market. It comes along with a maturity date that is usually determined by the term of the project that the concerned NPO is doing. As the maturity ends, this instrument can be written off from the book of the investor. It, as already said, does not come with a return and the risk that it carries is that the project that has been undertaken might not deliver the social effect. It will be regulated by the Security Exchange Board of India (HereinafterSEBI) through SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations 2022.

The N.P.Os, in order to access this marker, must show their potentiality by demonstrating their reports of past projects by making mandated disclosure. The capital market watchdog also mandates that the N.P.Os must publish a periodic report on the utilisation of funds raised and the reports on the project undertaken.

The mandated reports and the disclosure in other ways will help the investor to ascertain the efficiency of the N.P.Os and the potentiality of the N.P.Os. This help the N.P.Os with a higher potentiality to obtain the funds through this instrument. Furthermore, the checks and balances that the SEBI mandated will make the functioning of the N.P.Os is transparent and would do away with the information asymmetry. Consequently, to obtain funds, the N.POs will improve their operational efficiency thereby implementing the best practices. Moreover, allowing the instruments to be traded on a social stock exchange also ensures liquidity.

On another note with regard to fundraising by the N.P.Os, it has been proposed that these N.P.Os may raise funds through other instruments funds, social impact funds, and development impact bonds.

Analysing the scenario in other jurisdictions

Earlier the Social Development Projects were completely funded by individual philanthropists and to some extent by Government Grants. This N.P.Os are generally deprived of much-needed institutional funding. Nonetheless, this notification comes as godsent and at a time when India is short of funds of what NITIAyog estimated. It is to be remembered that its successful operation had some challenges as can be seen in various jurisdictions wherein, it is implemented. Examples are principally taken from a handful of major representative jurisdictions, these are Canada, South Africa, the United Kingdom, Singapore, and Portugal, point to be noted here is that most of the jurisdictions had already bitten the dust. Let’s begin with the first United Kingdom, the failure of the U.K’s version of the social stock exchange can be attributed to mainly two immediate reasons, one being a dearth of investors and investor incentives. Subsequently, it was reduced to a mere licensing body.

Similarly, in South Africa’s version of the social stock exchange, it was seen that only, before it shut its operation, $ 2.7 Million was raised after having served for more than 11 years. Likewise, Brazil’s version of the social stock exchange Bolsa de Valorous Socioambientais had remained inaccessible since 2018. Portugal’s social stock exchange also met with a similar fate.

The reasons for failing to meet its objectives of creating could be attributed to the fact that there is certainly a lack of investor motivation and a firm investor base. Having analysed the global reason for the failure of such a noble creation, another peculiarity that is seen in the proposed model of the social stock exchange in India is that it is more inclined towards the wealthy NPOs that could, with its enormous resources, comply with the mandated requisites and disclosures. Apparently, leaving out those small organisations which have a strong base on the rural side and working on the rural side of the country.


To achieve the purpose of establishing the social stock exchange and to make available institutional funding to the much-needed N.P.Os for the purpose of social development, it is imperative on the side of the Government that it must study the reasons for the failure of the project in other jurisdictions and take such measures which would mitigate the reasons for failure. It goes without saying that the Government has to give certain incentives in order to raise investor appetite. The government can do so by proposing a 100% tax concession for the investment made by the Z.C.Z.P instruments with 80G certification. Furthermore, the Government could, in this investment instrument, omit the Securities Transaction Tax and capital gain tax as well. In addition to it, Government can mandate that companies’ Corporate Social Responsibility, a certain portion of its expenditure be made through the Z.C.Z.P instrument.

The authority also can carry out investor awareness education programs and prepare potential investors about Z.C.Z.P and maintain a network of potential investors for the NPOs. It is indeed a commendable step to bring forward institutional funding from the capital market to the masses. It also works in another way whereby the traditional idea of wealth maximisation, risk ascertainment and aversion is not there. It is a noble step to uplift those sectors which work directly at the root level thereby ensuring sustainable development growth, and betterment of society. Nevertheless, the Government must make sure of its successful operationalisation by learning from the fate of similar establishments in other jurisdictions, ensuring a well-organized framework and rendering basic support to the NPOs. 

Author(s) Name: Sagnik Aditya (St. Xavier’s University, Kolkata)