Rule 7 — Procedure for notification of zero coupon bond. Made under s.2, s.32 of the Income-tax Act, 2025.
Rule 7 gives effect to Section 2 and Section 32 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) requires an entity — an infrastructure capital company, an infrastructure capital fund, an infrastructure debt fund or a public sector company under section 2(112) — that wants a zero coupon bond notified to apply in Form No. 2 at least three months before the date of issue of the bond.
Sub-rule (2) puts an outer edge on how far ahead the application may look: it cannot be made for a bond that is to be issued beyond a period of two financial years following the financial year in which the application is made. Sub-rule (3) requires the application to be disposed of within six months from the end of the month in which it was received.
Sub-rule (4) lists the documents that must accompany the application: a certificate of incorporation under the Companies Act, 2013 where the applicant is an infrastructure capital company, an infrastructure debt fund or a public sector company that is a Government company under section 2(45) of that Act; a copy of the trust deed registered under the Registration Act, 1908 where the applicant is an infrastructure capital fund; and a copy of the relevant Act where the applicant is a public sector company being a corporation established by or under a Central, State or Provincial Act.
Sub-rule (5) sets the conditions the Central Government must satisfy itself about before specifying the bond by notification. The period of life of the bond must be not less than ten years and not more than twenty years. The issuing entity must have 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. Arrangements must be in place for listing the bond on a recognised stock exchange in India. The entity must undertake, along with the application, to invest the money realised on the issue — 25% or more before the end of the financial year immediately following the financial year of issue, and the balance within four financial years immediately following that year. An infrastructure debt fund must additionally undertake to maintain a sinking fund for the interest that will accrue on all the zero coupon bonds subscribed, and to invest that interest in Government security as defined in section 2(f) of the Government Securities Act, 2006.
Sub-rule (6) requires the notification specifying the bond to give, inter alia, the name of the bond, its period of life, the time schedule of the issue, the amount to be paid on maturity or redemption, the discount, and the number of bonds to be issued. Sub-rule (7) allows the Central Government to reject the application where the applicant fails to fulfil the conditions, after a reasonable opportunity of being heard.
Sub-rule (8) requires every entity to submit, within two months from the end of each financial year referred to in sub-rule (5)(d), a certificate in Form No. 3 from an accountant as defined in section 515(3)(b) specifying the amount invested in each year. Sub-rule (9) gives the Central Government the power to withdraw the notification if the applicant fails to fulfil any of the conditions in the rule. Sub-rule (10) takes "discount" and "period of life of the bond" from section 32(d)(i) and (ii), and defines "infrastructure debt fund" as the fund as may be notified by the Central Government under Schedule VII [Table: Sl. No. 46].
A zero coupon bond under section 2(112) is a bond the Central Government has notified, and the discount on it is dealt with under section 32(d). The Act does not say how an issuer gets that notification, what the Government must be satisfied of before granting it, or what happens if the issuer later fails the conditions. This rule supplies all of it: the form, the lead time, the documents, the substantive conditions on tenure, rating, listing and deployment of the proceeds, the annual accountant's certificate, and the power of withdrawal.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Lead time for the application | At least three months | Before the date of issue of the bond; application in Form No. 2 | Sub-rule (1) |
| Outer limit on how far ahead an issue may be applied for | Two financial years | The bond must not be one to be issued beyond two financial years following the financial year in which the application is made | Sub-rule (2) |
| Time to dispose of the application | Six months | From the end of the month in which the application was received | Sub-rule (3) |
| Minimum period of life of the bond | Ten years | A condition the Central Government must satisfy itself about before notifying the bond | Sub-rule (5)(a) |
| Maximum period of life of the bond | Twenty years | A condition the Central Government must satisfy itself about before notifying the bond | Sub-rule (5)(a) |
| Credit rating agencies giving an investment grade rating | At least two | Agencies registered under section 12(1A) of the Securities and Exchange Board of India Act, 1992 | Sub-rule (5)(b) |
| First tranche of the realisation to be invested | 25% or more | Before the end of the financial year immediately following the financial year in which the bond is issued | Sub-rule (5)(d)(i) |
| Period for investing the balance of the realisation | Four financial years | Immediately following the financial year in which the bond is issued | Sub-rule (5)(d)(ii) |
| Time to file the accountant's certificate in Form No. 3 | Two months | From the end of each financial year referred to in sub-rule (5)(d) | Sub-rule (8) |
Notification is prospective and time-boxed at both ends: the application must come at least three months before issue, and it cannot cover a bond to be issued more than two financial years after the financial year of application, so an issuer cannot obtain one notification for an indefinite pipeline. The conditions in sub-rule (5) are not spent once the notification issues — sub-rule (8) requires an accountant's certificate for each financial year in the deployment schedule, and sub-rule (9) lets the Government withdraw the notification for failure to fulfil any condition in the rule, which includes the 25% and four-year deployment undertaking. The investment condition is on the money realised on the issue, not on the issuer's funds generally. Note also that the rule does not itself define "discount" or "period of life of the bond" — sub-rule (10) sends both to section 32(d)(i) and (ii) — and does not itself list infrastructure debt funds, which are those notified under Schedule VII [Table: Sl. No. 46].
An infrastructure capital company plans to issue a fifteen-year zero coupon bond in September of a financial year. It must apply in Form No. 2 by June at the latest, attaching its certificate of incorporation, and the Board has six months from the end of the month of receipt to dispose of the application. If the issue realises Rs. 200 crore, at least Rs. 50 crore must be invested before the end of the next financial year and the remaining Rs. 150 crore within four financial years following the year of issue, with a Form No. 3 certificate from an accountant filed within two months of the end of each of those years.
An issuer meets it when preparing Form No. 2 and the annual Form No. 3 certificate; an investor meets it only indirectly, in the Central Government notification specifying the bond, which under sub-rule (6) states the bond's name, life, issue schedule, maturity amount, discount and number of bonds.
shall be made in Form No. 2 at least three months before the date of issue of such bond
the period of life of the bond is not less than ten years and not more than twenty years
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.