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Securities and Exchange Board of India (SEBI) has come out with a circular on the 19th of September 2022 allowing eligible Not for Profit Organizations (NPOs) to raise funds via the newly created Social Stock Exchange for the achievement of their objectives. This Social Stock Exchange will be a part of the existing stock exchange.

Traditionally the fundraising by the NPOs was carried out through donations, holding exhibitions/seminars/conferences in line with the objectives of the NPO, or getting funds from overseas charitable funding agencies via foreign contributions Route, through grant money granted by the government and/or non-government bodies, the contribution made by members of NPOs, etc. In the recent past, one additional route of raising funds was opened by the Government through Corporate Social Responsibility (CSR) a statutory requirement.

Zero Coupon Zero Principal Instrument vis-a-vis NPOs

The big question before the Government was how to use Social Stock Exchange with the existing stock exchange to help NPOs in raising funds. Historically funds raised and received by NPOs were never returned to the funding agencies/individuals but are treated as non-returnable/non-refundable incomes/donations of the receiver i.e., NPOs. In certain cases, loans raised from financial institutions or from other sources including unutilized funds received from funding agencies against specific purpose/projects used to be treated as liability and not income of an NPO. Therefore, most of the funds received by an NPO used to be treated as income in the books of account, and unutilized funds during a financial year are shown as surplus carried forward to be expended in the coming financial year/years and not as a liability in the Balance Sheet.

In continuation of this, the Government created a new fund-raising instrument called 'ZERO INTEREST ZERO PRINCIPAL INSTRUMENT'. On July 16, 2022, Government declared 'zero interest zero principal instrument' as a security that can be listed on a particular stock exchange.

A gazette notification was issued to define the Zero Interest Zero Principal instrument as an instrument issued by a not-for-profit organization that will be registered with the Securities and Exchange segment of a recognized stock exchange in accordance with the Securities and Exchange Board of India (SEBI) regulations.


What are 'Zero interest Zero Principal Instruments'? In common parlance, an instrument issued through a stock exchange to raise funds as debt is termed a Bond. A bond is an instrument having a life cycle and rate of interest attached to it e.g., 10% GOI Bonds series 2025. Here the rate of interest per annum is 10% and the year of maturity/redemption is 2025. In a few cases, we have Zero interest bonds with a defined year of maturity/redemption, especially GOI/RBI bonds where one knows the amount of maturity at the end of the life of the bond without any interest during the life of a bond. Such bonds are sold at a deep discount and the investor of the bond knows the difference between the amount of investment and the value of maturity is the interest for the period of holding.

In the case of zero interest zero principal instrument there are two components one is zero interest in simple words during the life of instrument the buyer of the instrument will get no interest and zero Principal in simple terms there is no maturity value of the instrument. The process is simple NFO must register with the social stock exchange segment of a stock exchange. Once found eligible can issue zero interest zero principal instruments to raise funds to be used for the achievement/fulfilment of its objectives. The minimum issue size of zero interest zero principal instrument needs to be not less than Rs one crore and the minimum application size needs to be Rs two lakhs with a defined life of such instruments.


There are still certain clarifications required to understand the process fully like listening, selling, and purchase of such instruments from the financial market, etc. It is felt that the NPO sector with the help of the social stock exchange will move further in the direction of transparency and accountability as there are strict compliance requirements to be followed by the NPO after the funds are raised through this window.


Published by

Dilip K Raina
Category Corporate Law   Report

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