Zero Coupon Zero Principle Bonds

“A Bond is a fixed income instrument that represents a loan made by an investor to a borrower.” In simpler words, bond acts as a contract between the investor and the borrower. Mostly companies and government issue bonds and investors buy those bonds as a savings and security option.

These bonds have a maturity date and when once that is attained, the issuing company needs to pay back the amount to the investor along with a part of the profit. This kind of dealing with bonds between the issuer and the investor is done by brokers.

What are Government Bonds?

A bond issued by the Government of a country at a fixed rate of interest is called Government Bonds. These kinds of bonds are considered to be low-risk investments. Examples of Government bonds include Treasury Bills, Municipal Bonds, Zero-coupon Bonds, etc.

Features of a Bond for Investor

When an Investor is buying bonds, there are a few things which may be given consideration before investing in them. Given below are such important points to remember while investing in any bond:

• Secured & Unsecured Bonds: Unsecured Bonds, also known as debentures are mostly the bonds issued by companies with a good reputation, high credit rating and the credibility of the company. The returns on such bonds are based on the profit and the success of the company. If the company makes a profit, then the amount along with interest is returned to the investor, else there may be difficulty in regaining the invested amount as well. The secured bonds offer some kind of security to the investor. These bonds are mostly considered to be Government bonds.
• Taxation: Looks for bonds which exempt tax. Few corporate bonds levy tax on their bonds and bonds issued by Government, municipality bonds and few other do not impose a tax on the profit earned.
• Preference of Liquidation: In case a Company gets in loss and is in debt, the money gained by selling the assets of the company is given in a certain order of preference. This is called preference of liquidation. The regained amount is distributed in ascending order of time in which the investments were made. Starting with the oldest Investors and then to the new ones.
• Date of Maturity: Ensure that you check the maturity period of the bond and invest in something where you can earn more with a shorter time duration
• Coupon Rate: The rate of interest at which a bond is issued and the Company is liable to pay the Investor is called the coupon rate. Research and look for Bond options which offer high coupon rate

Different Types of Bonds

There are various types of Bonds. A few of them have been discussed below in brief.

• Traditional Bond: A bond in which the entire principal can be withdrawn at a single time after the bond’s maturity date is over is called a Traditional Bond.
• Callable Bond: When the issuer of the bond calls out his right to redeem the bond even before it reaches its maturity is called a Callable Bond. Through this type of bonds, the issuer can convert a high debt bond into a low debt bond.
• Fixed-Rate Bonds: When the coupon rate remains the same through the course of the investment, it is called Fixed-rate bonds.
• Floating Rate Bonds: When the coupon rate keeps fluctuating during the course of an investment, it is called a floating rate bond.
• Puttable Bond: When the investor decides to sell their bond and get their money back before the maturity date, such type of bond is called a Puttable bond.
• Mortgage Bond: The bonds which are backed up by the real estate companies and equipment are called mortgage bonds.
• Zero-Coupon Bond: When the coupon rate is zero and the issuer is only applicable to repay the principal amount to the investor, such type of bonds are called zero-coupon bonds.
• Serial Bond: When the issuer continues to pay back the loan amount to the investor every year in small instalments to reduce the final debt, such type of bond is called a Serial Bond.
• Extendable Bonds: The bonds which allow the Investor to extend the maturity period of the bond are called Extendable Bonds.
• Climate Bonds: Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.
• War Bonds: War Bonds are issued by any government to raise funds in cases of war.
• Inflation-Linked Bonds: Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds

Unnati ZCZP Bonds

Social stock exchange sees 1^st listing with Unnati Foundation 1st entity in December 2023.

What are Social Stock Exchanges (SSE)?

• A separate segment of the existing Stock Exchange that can help social enterprise’s to raise funds from public through the stock exchange mechanism.
• It will act as a medium between Social Enterprises and fund providers.
• SEBI had permitted social enterprises registered on these exchanges to raise funds through zero coupon zero principal bonds (ZCZP) in 2022.

What is a ZCZP instruments?

• ZCZP – Zero Coupon Zero Principle are financial instrument that are included in the list of securities under Securities Contracts (Regulation) Act, 1956.
• They do not give any interest, and investors will not get any money back on the maturity of the bond.

• Eligibility criteria for issuance – Only by NPO that are registered with Social Stock Exchange (SSE).
• ZCZP can only be issued for a specific project with specific tenure.
• The project must fall under the list of eligible activities under SEBI (ICDR) Regulations, 2018.
• Issuance - They are issued through private placement or public issuance.
  • Minimum issue size – Rs. 50 Lakh (originally Rs.1 crore)
  • Minimum application size – Rs.10, 000 (originally Rs.2 lakh)
  • Minimum subscription required - 75% of the funds proposed
• Trade – They shall be issued in dematerialized form only.
• They are not available for trading in the secondary market, but they can be transferred to legal heirs.
• Maturity – It will mature when the project for which they are raised terminate, or 12 months from the date of allotment.

What is Unnati ZCZP Bonds?

• Issuer – SGBS Unnati Foundation, an NPO formed in November 2011.
  • Unnati – Vocational training program for underprivileged and unemployed youth in the age group of 18 to 25 years.
  • UNXT – 1 month training programme for final year students at government colleges.
  • Sugam – A grassroot entrepreneurship accelerator helping non-urban youth to develop scalable businesses.
• Need of funds –To train up to 10,000 graduating youth from government colleges in Uttar Pradesh, Madhya Pradesh, Karnataka, Andhra Pradesh and Tamil Nadu to help them secure employment.
  • The youth will be trained for 165 hours (classroom learning and self-learning content on a mobile application).
  • Cost per head for training would be ?2,000 per youth.
• Specifics – It is a public issue with face value of ?1 each of ?2 crore that will be listed on the NSE.

Unnati ZCZP bond is the 1^st such listing on SSE segment in India.

• This listing will be displayed along with other such future bond issuances on the social stock exchange page on the NSE website.
• It raised Rs 1.8 crore from 4 investors and include brokerage firm Zerodha and National Bank for Agriculture and Rural Development (NABARD).

What are the benefits of these ZCZP instruments?

• There are obviously no pecuniary benefits from these instruments as it is akin to a donation made to a charity.
• Greater transparency - The end use of the funds can also be monitored since the enterprises have to disclose details of money utilised and balance amount remaining to exchanges.
• Visibility to the social enterprises - It helps them to approach the public at regular intervals if they can show good outcomes.

Quick Facts

• Social enterprises – Enterprise that are engaging in the activity of creating positive social impact and that meets primacy of their social intent.
  • Not-for-profit organization
  • For profit social enterprise