CSR via Zero Coupon Zero Principal Instruments: Rule 4A

CSR through Zero Coupon Zero Principal (ZCZP) Instruments: Detailed Analysis of Rule 4A

The Ministry of Corporate Affairs (MCA) introduced a significant reform in the CSR framework through the Companies (CSR Policy) Amendment Rules, 2026 notified on 27 May 2026. This amendment allows companies to undertake a portion of their Corporate Social Responsibility (CSR) obligations by subscribing to Zero Coupon Zero Principal (ZCZP) Instruments issued by eligible Not-for-Profit Organizations (NPOs) listed on the Social Stock Exchange (SSE).

This move aims to deepen the Social Stock Exchange ecosystem and create a new avenue for channeling CSR funds toward social impact projects.

What Changed?

Two important amendments were made:

Amendment to Schedule VII of the Companies Act, 2013 :

A new eligible CSR activity was inserted: “Subscription to Zero Coupon Zero Principal (ZCZP) Instruments issued by Not-for-Profit Organizations listed on the Social Stock Exchange.”

This means companies can now use a portion of their CSR budget to subscribe to eligible ZCZP instruments.

Insertion of Rule 4A :

A new Rule 4A was inserted in the Companies (CSR Policy) Rules, 2014 providing the operational framework for CSR spending through ZCZP instruments.

What is a Zero Coupon Zero Principal (ZCZP) Instrument?

A Zero Coupon Zero Principal Instrument is a unique security that Does not pay any interest (Zero Coupon), Does not repay the principal amount (Zero Principal), Is issued solely for social impact funding and Is issued by eligible Not-for-Profit Organizations listed on the Social Stock Exchange.

Unlike conventional bonds, the subscriber does not expect any financial return. The return is purely social impact. Example Suppose A listed NPO proposes a project for rural education. The NPO raises INR 5 crore through ZCZP instruments on the Social Stock Exchange. A company subscribes INR 50 lakh as part of its CSR obligation. The company receives no repayment or interest. The funds are utilized by the NPO for the approved social project.

What is the Social Stock Exchange (SSE)?

The Social Stock Exchange is a specialized platform established under the framework of the Securities and Exchange Board of India (SEBI) to enable social enterprises and NPOs to raise funds transparently for social welfare activities. The SSE functions as a dedicated segment of recognized stock exchanges and focuses on Education, Healthcare, Rural development, Poverty alleviation, Women empowerment, Environmental sustainability and Other social causes

Rule 4A: Key Provisions

Maximum CSR Investment Limit :

A company cannot invest unlimited CSR funds through ZCZP instruments. Rule 4A provides: Expenditure through ZCZP Instruments shall not exceed 10% of the total CSR expenditure of the company for that financial year. Example Total CSR Obligation = INR 2 Crore. Maximum permissible investment through ZCZP: INR 2 Crore × 10% = INR 20 Lakh. The remaining 90% must be utilized through other eligible CSR activities.

Exemption from Impact Assessment

Generally, companies undertaking large CSR projects may be required to conduct Impact Assessment.

However, under Rule 4A: The subscribing company is not required to carry out impact assessment for projects funded through ZCZP instruments. This reduces compliance burden for the company. Responsibility for implementation and monitoring rests primarily with the NPO issuing the instrument.

Obligations of the NPO Raising Funds

The NPO issuing the ZCZP Instrument must comply with specific conditions.

Project Completion Timeline : The NPO must undertake and complete the project: Within 3 succeeding financial years from the date of issue of the ZCZP Instrument. This ensures that funds are not kept idle for prolonged periods. Example ZCZP issued in FY 2026-27, Project must be completed by FY 2029-30.

Transfer of Unspent Amount :

If the ZCZP instrument is delisted or terminated and unutilized funds still remain: The NPO must Transfer the unspent amount to a fund specified under Schedule VII of the Companies Act, 2013. And Submit a compliance report to SEBI. This provision protects CSR money from being indefinitely retained.

Applicability of Rule 4

Rule 4A states that provisions of Rule 4 relating to CSR implementation shall apply to CSR expenditure through ZCZP instruments except Rule 4(5) and Rule 4(6). Thus, most implementation safeguards continue to apply.

New Definitions Introduced

1. Definition of ZCZP Instrument :

Rule 2(1)(l) defines a ZCZP Instrument as A security issued by a Not-for-Profit Organization registered with the Social Stock Exchange segment of a recognized stock exchange in accordance with SEBI regulations. Therefore, only SEBI-compliant instruments qualify.

1. 2. Definition of Not-for-Profit Organization (NPO)

Rule 2(1)(ha) adopts the meaning assigned under: Regulation 292A(e) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Accordingly, only SSE-registered eligible NPOs can issue such instruments.

Benefits of the New Framework

For Companies

• Diversified CSR Implementation: Companies now have another avenue to deploy CSR expenditure.
• Reduced Administrative Burden : No direct project execution is required.
• No Impact Assessment Responsibility : Compliance burden is lower.
• Better Transparency : Projects are routed through SEBI-regulated Social Stock Exchange mechanisms.

For NPOs

• Access to Capital : NPOs can raise structured funding for social projects.
• Enhanced Visibility : Listing on SSE increases public trust and credibility.
• Long-Term Funding : Larger and more stable CSR funding pool becomes available.

Important Limitations

Companies should note ZCZP route cannot be used for the entire CSR budget, Maximum utilization is capped at 10% of annual CSR spending, Only SSE-listed NPOs are eligible, Subscription does not provide any financial return, Compliance with SEBI and CSR regulations remains mandatory.

Practical Example

• ABC Ltd. has a CSR obligation of INR 5 crore during FY 2026-27. Maximum amount that can be invested through ZCZP: INR 5 crore × 10% = INR 50 lakh
• ABC Ltd. subscribes INR 50 lakh in ZCZP instruments issued by an SSE-listed NPO engaged in healthcare projects.
• ABC Ltd. treats the amount as CSR expenditure.
• No impact assessment is required by ABC Ltd.
• The NPO must utilize funds within the prescribed 3-year period.
• Any unspent amount upon termination must be transferred to a Schedule VII fund.

Key Takeaways

• Rule 4A permits CSR expenditure through ZCZP Instruments issued by SSE-listed NPOs.
• Maximum investment is restricted to 10% of annual CSR expenditure.
• Companies are exempt from impact assessment requirements for such investments.
• NPOs must complete projects within 3 succeeding financial years.
• Unspent funds must be transferred to Schedule VII funds upon termination of listing.
• ZCZP instruments are social impact securities with no interest and no principal repayment.
• The amendment strengthens the Social Stock Exchange ecosystem and provides a regulated mechanism for CSR deployment.

Conclusion

The introduction of Rule 4A marks a major evolution in India’s CSR framework. It integrates CSR spending with the Social Stock Exchange model, allowing companies to channel a portion of their mandatory CSR contributions into transparent, SEBI-regulated social impact projects. While the 10% cap ensures that companies continue direct CSR implementation, the ZCZP framework creates a structured method of funding large-scale social initiatives through credible Not-for-Profit Organizations. This reform is expected to enhance accountability, transparency, and efficiency in the utilization of CSR funds while strengthening India’s social finance ecosystem.