Rule 7: Notification of zero coupon bonds
Rule 7 prescribes how an eligible issuer applies for Central Government notification of a zero coupon bond under section 2(112). It covers the application timetable, issuer documents, bond conditions and continuing investment reporting.
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Rule 7 - Procedure for notification of zero coupon bond
(1) An application by an entity, being an infrastructure capital company or infrastructure capital fund or infrastructure debt fund or a public sector company under section 2(112), for notification of any zero coupon bond proposed to be issued by it shall be made in Form No.2 at least three months before the date of issue of such bond.
(2) An application made under sub-rule (1) shall not be made for notification of a bond which is to be issued beyond a period of two financial years following the financial year in which such application is made.
(3) An application made under sub-rule (1) shall be disposed of within a period of six months from the end of the month in which such application was received.
(4) Every application, under sub-rule (1), shall be accompanied by the following documents:— (a) where the application is made by any infrastructure capital company or infrastructure debt fund or a public sector company, being a Government company defined under section 2(45) of the Companies Act, 2013 (18 of 2013), a copy of certificate of incorporation under the said Act; (b) where the application is made by any infrastructure capital fund, a copy of the trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908); and (c) where the application is made by a public sector company, being any corporation, established by or under any Central Act or State Act or Provincial Act, a copy of the relevant Act.
(5) The Central Government, while specifying a zero coupon bond, by notification, shall satisfy itself that the following conditions are fulfilled:— (a) the period of life of the bond is not less than ten years and not more than twenty years; (b) the entity proposing to issue a zero coupon bond has an investment grade rating from at least two credit rating agencies registered under section 12(1A) of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (c) necessary arrangement has been made by the said entity for listing the zero coupon bond in a recognised stock exchange in India; (d) the entity shall furnish an undertaking along with the application that the money realised on issue of the zero coupon bond shall be invested by it in the following manner,:— (i) 25% or more of such realisation before the end of the financial year immediately following the financial year in which the bond is issued; (ii) the balance of such realisation within a period of four financial years immediately following the financial year in which the bond is issued; and (e) where the application is made by an infrastructure debt fund, such fund shall along with the application, submit an undertaking that a sinking fund shall be maintained for the interest which will accrue on all the zero coupon bonds subscribed and such interest shall be invested in Government security as defined under section 2(f) of the Government Securities Act, 2006 (38 of 2006).
(6) The Central Government, after having satisfied itself about fulfilling of the conditions referred to in this rule, shall specify the bond, by notification, giving therein, inter alia, the following particulars:— (a) name of the bond; (b) period of life of the bond; (c) the time schedule of the issue of the bond; (d) the amount to be paid on maturity or redemption of the bond; (e) the discount; and (f) the number of bonds to be issued.
(7) The Central Government may, if the applicant fails to fulfil the conditions referred to in this rule, reject the application for notification after giving a reasonable opportunity of being heard.
(8) Every entity shall submit within two months from the end of each financial year referred to in sub-rule (5)(d), a certificate from an accountant as defined in section 515(3)(b), specifying the amount invested in each year in Form No. 3.
(9) The Central Government shall have the power to withdraw the notification, if the applicant fails to fulfil any of the conditions referred to in this rule.
(10) For the purposes of this rule,— (i) "discount" and "period of life of the bond" shall have the meanings respectively assigned to them in section 32(d)(i) and (ii); and (ii) "infrastructure debt fund" shall mean the infrastructure debt fund as may be notified by the Central Government under Schedule VII[Table Sl. No. 46].
Introduction
The issuer must distinguish an application from an actual notification. Meeting a commercial bond description alone does not establish notified zero coupon bond status for the Act.
Rule breakdown
Who applies and which documents are needed
The rule identifies infrastructure capital companies, infrastructure capital funds, infrastructure debt funds and public sector companies under section 2(112). Match the issuer’s actual legal form to sub-rule (4): incorporation certificate, registered trust deed or the establishing Central, State or Provincial Act, as applicable.
The initial application is Form 2. The rule assigns disposal within six months from the end of the month of receipt; this is not a statement that silence automatically approves the bond.
Build the bond timetable correctly
Count the minimum three-month lead time back from the proposed issue date. Separately check the outer issue window: two financial years following the financial year in which the application is made. These are different restrictions.
The Government’s notification specifies matters including the bond’s name and life, issue schedule, maturity or redemption payment, discount and number of bonds. Retain the actual notification and align issuance with it.
Rating, listing and investment conditions
The life of the bond must be at least ten and at most twenty years. The applicant needs an investment-grade rating from at least two SEBI-registered credit rating agencies and the required listing arrangement in a recognised Indian stock exchange.
The investment undertaking concerns the money realised on issue. At least 25% is to be invested before the end of the immediately following financial year, and the balance within four financial years immediately following the issue financial year. An infrastructure debt fund must additionally undertake to maintain the specified interest sinking fund and invest that interest in Government securities.
Illustrative investment calendar
Hypothetical: a notified bond is issued during financial year 2026–27. Under the rule’s investment undertaking, at least 25% of the realisation is invested before the end of financial year 2027–28, and the balance within the four financial years immediately following the issue financial year 2026–27, ending 2030–31. This example assumes the bond and issuer satisfy the other conditions; it does not establish eligibility by itself.
After notification: certification and consequences
For each financial year referred to in the investment condition, obtain an accountant’s certificate in Form 3 specifying the amount invested that year and submit it within two months after year-end. The accountant definition is the one in section 515(3)(b).
Before notification the Government may reject an application for failure to fulfil the conditions after a reasonable hearing opportunity. After notification it has power to withdraw the notification for failure to fulfil the rule’s conditions. Keep initial approval evidence and subsequent compliance records together.
Key takeaways
Apply before the issue
Form 2 must be filed at least three months before issue; the proposed issue cannot fall beyond the two financial years following the application financial year.
Tenure and credit standards
The bond life must be ten to twenty years, with investment-grade ratings from at least two registered agencies and arrangements for Indian recognised-exchange listing.
Investment undertaking
At least 25% of the realisation must be invested before the end of the next financial year, with the balance within the four following financial years.
Ongoing certification
Form 3 accountant certification is due within two months after each relevant financial year; conditions remain relevant after notification.
Practical checklist
- Identify the eligible issuer category and correct constitution document.
- Calendar the application, issue, investment and Form 3 dates separately.
- Retain two qualifying ratings, listing arrangements and the Government notification.
- Track the additional sinking-fund undertaking where the issuer is an infrastructure debt fund.
Avoid
- Do not equate application receipt with automatic notification.
- Do not replace the two required rating agencies with one.
- Do not measure the investment periods simply as anniversaries of the issue date.
FAQs
Which form starts the notification process?
The eligible issuer applies in Form 2 at least three months before the proposed issue date, within the additional issue window in sub-rule (2).
Is one investment-grade rating enough?
No. Sub-rule (5)(b) requires investment-grade ratings from at least two credit rating agencies registered under the specified SEBI provision.
Does notification end the issuer’s reporting obligations?
No. The investment conditions and annual Form 3 certification continue to apply, and failure to fulfil conditions can lead to withdrawal of the notification.
Does Rule 7 calculate an investor’s final tax liability?
No. It governs the notification procedure and conditions. The applicable Act provisions determine the separate issuer or investor tax treatment.
Glossary
- Notified zero coupon bond
- A bond specified by the Central Government under the relevant Act framework after the prescribed conditions are satisfied.
- Investment realisation
- The money realised on issue to which the rule’s investment undertaking applies.
- Form 3 certificate
- The accountant’s annual certificate specifying the amount invested, submitted within the rule’s time limit.