Description

SEBI modifies conditions to allow zero coupon debt securities to be issued at reduced face value of Rs. Ten Thousand, expanding the earlier restriction that only required interest/dividend bearing securities.

Summary

SEBI has modified Clause 1.3 of Chapter V of the NCS Master Circular to allow zero coupon debt securities to be issued at a reduced face value of Rs. Ten Thousand. Previously, only interest/dividend bearing securities paying regular coupons could be issued at this reduced denomination. The amendment recognizes that zero coupon bonds, which are issued at a discount and redeemed at par, provide investors with compounded returns and portfolio diversification opportunities.

Key Points

  • Zero coupon debt securities can now be issued at face value of Rs. Ten Thousand on private placement basis
  • Zero coupon bonds must have fixed maturity without structured obligations
  • These instruments are issued at a discount and redeemed at par, with returns realized through the difference
  • The modification expands the July 03, 2024 circular (SEBI/HO/DDHS/DDHS-PoD-1/P/CIR/2024/94) which originally allowed only interest/dividend bearing securities at reduced denomination
  • Applies to both debt securities and non-convertible redeemable preference shares
  • All other conditions for reduced denomination issuance remain unchanged (including appointment of debenture trustee)

Regulatory Changes

Clause 1.3 of Chapter V of the Master Circular no. SEBI/HO/DDHS/DDHS-PoD/P/CIR/2025/0000000137 dated October 15, 2025 has been partially modified.

Previous Requirement: Debt securities at Rs. Ten Thousand face value had to be “interest/dividend bearing security paying coupon/dividend at regular intervals with a fixed maturity without any structured obligations”

Modified Requirement: Debt securities at Rs. Ten Thousand face value can now be either:

  • Interest/dividend bearing security paying coupon/dividend at regular intervals with fixed maturity without structured obligations; OR
  • Zero coupon debt security with fixed maturity without structured obligations

Compliance Requirements

Applicable to:

  • Issuers who have listed and/or propose to list non-convertible securities
  • Recognized Stock Exchanges
  • Registered Depositories
  • Registered Credit Rating Agencies
  • Debenture Trustees
  • Merchant Bankers
  • Registrars to an Issue and Share Transfer Agents
  • Bankers to an Issue

Requirements:

  • Issuers must appoint debenture trustee (as per existing conditions)
  • Zero coupon debt securities must have fixed maturity
  • No structured obligations are permitted
  • All other conditions from the original circular remain applicable

Important Dates

  • Circular Reference Date: July 03, 2024 (SEBI/HO/DDHS/DDHS-PoD-1/P/CIR/2024/94)
  • Master Circular Date: October 15, 2025 (SEBI/HO/DDHS/DDHS-PoD/P/CIR/2025/0000000137)
  • Current Circular Date: December 18, 2025
  • Effective Date: Immediate (no specific implementation date mentioned)

Impact Assessment

Market Impact:

  • Increases flexibility for debt issuers to structure offerings at reduced denominations
  • Expands investor access to zero coupon instruments at lower entry points (Rs. Ten Thousand vs. higher denominations)
  • May increase liquidity in the debt market by allowing smaller ticket sizes for zero coupon bonds

Operational Impact:

  • Issuers gain additional structuring options for private placement debt securities
  • Zero coupon bonds provide compounded returns without interim payouts, attractive for long-term investors
  • Investors benefit from portfolio diversification opportunities through discounted issuance structures

Regulatory Rationale: Market participants highlighted that zero coupon bonds are economically similar to interest-bearing securities as they provide returns through discount-to-par structure, justifying their inclusion in the reduced denomination framework. The exclusion was deemed unnecessary given their fixed maturity and structured return profile.

Impact Justification

Regulatory modification expands issuance flexibility for debt securities by allowing zero coupon instruments at reduced face value, benefiting issuers and investors but not directly impacting specific stocks or requiring immediate compliance action