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What Does Sebi’s New Rule ‘For Zero Coupon Zero Principal’ Bonds Mean For Donors?

Sebi has modified the social stock exchange rules to boost its access to the general public.

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Versha Jain
November 28, 2023
For Zero Coupon Zero Principal

For Zero Coupon Zero Principal

The Securities and Exchange Board of India (SEBI) has modified the rules for the Social Stock Exchange (SSE) and the Zero Coupon Zero Principal Bonds (ZCZP) to make them more accessible to the public. On November 25, Sebi approved reducing the issue size of ZCZP from Rs 1 crore to Rs 50 lakh. ZCZPs are issued by the SSE-listed not-for-profit organizations (NPOs). It has also reduced the minimum application size for donors to Rs 10,000 from Rs 2 lakh. Sebi said these decisions will enable “wider participation of subscribers”.

Additionally, the change in the terminology from ‘Social Auditor’ to ‘Social Impact Assessor’ is intended to convey a positive approach towards the social sector. In short, these changes aim to encourage small donors in the philanthropy segment of the market. Senior citizens looking to donate money can also consider this avenue.

Let us delve deeper into what SSE and ZCZP entail. What is A Social Exchange?

The idea of a social stock exchange was proposed in the union budget 2019-20 to bring the capital market closer to the social welfare projects. In 2022, Sebi gave a detailed framework and final approval to set up the Bombay Stock Exchange Social Stock Exchange (BSE SSE). Currently, 32 NPOs are listed on the BSE SSE. It also approved setting up the National Stock Exchange Social Stock Exchange (NSE SSE) in early 2023.

What Is Zero Coupon Zero Principal (ZCZP) Instruments?

The ‘zero-coupon, zero-principal’ instruments are not stocks or bonds but instruments for donating money to the NPOs listed in the SSE. As the name indicates, ZCZP neither offers interest nor returns the principal. As it is a donation to the entity, not a loan or investment, the money will not be returned to the donor.

As per the NSE website, the listed NPOs can raise funds by issuing Zero Coupon Zero Principal Instruments, mutual fund schemes, or any other means specified by Sebi.

What Does The Change In Rules Mean For You?

There are two main objectives behind these donations: welfare and tax benefits. Let’s learn more about them.

Intent Of Welfare: When one donates money, the intention is to see the betterment of the people it is donated to. As the listed entities must follow Sebi’s regulations and conduct a social impact assessment, there is more transparency in the process and the utilization of donors’ funds.

Moreover, the reduced ticket size would mean that many small donors can now invest in SSE-listed organizations and get more transparent information about the funds donated, their use, and the impact created.

Preeti Zende, a Sebi-registered investment adviser, says, “According to the new change in Zero Coupon Zero Principal Instruments (ZCZP) and issue size by Sebi, now the small ticket donors’ participation will increase as the limit is being reduced from Rs 2 lakh to Rs 10,000”. She adds, “As the ticket size is decreased, small investors, if they want to invest, can invest some portion of their money”.

Tax Benefits: A donation enjoys the tax benefit under section 80G of the Income-tax Act. Usually, private, not-for-profit entities offer a 50 percent tax deduction. In contrast, government entities in the segment offer a 100 percent deduction from taxable income, such as the Prime Minister National Relief Fund (PMNRF), which is eligible for a 100 percent deduction from the taxable income. A donation through ZCZP is eligible for tax benefits.

The SSE is in the initial phase, and so is the ZCZP. While the recent changes aim to offer ease in donating money to listed NPOs, the primary benefit of ZCZP for donors is the credibility and transparency it provides due to being listed on the stock exchange platform.

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