A New Route for CSR Deployment: ZCZP Instruments on the Social Stock Exchange

By Vikrant Rana and Shantam Sharma

If your company is required to spend on Corporate Social Responsibility (“CSR”) under the Companies Act, 2013 (“Act”), a new and structured route is now available, effective from May 27, 2026. The Ministry of Corporate Affairs (“MCA”) has amended the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”) to permit companies to direct a portion of their CSR budget through the Social Stock Exchange (“SSE”) via Zero Coupon Zero Principal (“ZCZP”) instruments. This update is of direct relevance to compliance teams, CSR committees, company secretaries, and in-house counsel.

What Has Changed?

The MCA has inserted Rule 4A into the CSR Rules via the amendment notification dated May 27, 2026.[1] This introduces the following changes to the CSR framework:

1. Up to 10% of your company’s annual CSR obligation under Section 135 of the Act may now be deployed through subscription to ZCZP instruments issued by SEBI-registered not-for-profit organisations (“NPOs”) listed on the Social Stock Exchange (BSE or NSE platform).
2. The amendment notification inserts Rule 4A into the CSR Rules to formalise this route.[2]

What Is a ZCZP Instrument and Why Does It Matter?

A Zero Coupon Zero Principal instrument is a regulated social investment vehicle. When your company subscribes to one, the entire subscribed amount is deployed toward social projects run by the issuing NPO. The instrument carries no coupon (no interest payable to the NPO) and provides for no repayment of principal. It is not a loan or an asset on your company’s books. It is a direct social spend, structured through a regulated, exchange-listed mechanism under SEBI oversight.

This mechanism is significant because it brings capital market infrastructure, including SSE listing requirements, SEBI regulation, and public disclosure norms, into the CSR ecosystem. Companies are not simply writing a cheque to an NGO; they are subscribing through a regulated platform with verified, listed organisations.

How Does It Work in Practice?

The structural flow for deploying CSR funds through the ZCZP route is as follows:

1. A company subject to Section 135 of the Act identifies an NPO that is registered with SEBI and listed on the Social Stock Exchange (BSE or NSE).
2. The company subscribes to that NPO’s ZCZP instruments through the SSE platform.
3. The subscription amount, capped at 10% of the company’s Annual CSR Obligation, is recorded as eligible CSR expenditure.
4. The NPO must complete the funded project within 3 Financial Years from the date of ZCZP instrument issuance.
5. Upon termination of the NPO’s SSE listing, any unspent amount must be transferred to any Schedule VII Fund and reported to SEBI.

What Are the Benefits?

1. No Impact Assessment is required for projects funded through the ZCZP route, removing a compliance burden that would otherwise apply to CSR projects above a specified threshold.
2. SEBI oversight of the NPO and the SSE platform provides an additional layer of accountability and independent verification.
3. Structured, trackable deployment of CSR funds through established exchange infrastructure.
4. Supports India’s broader Social Stock Exchange ecosystem and the growth of verified social impact organisations.

What Should Your Company Do?

If your company wishes to utilise this route, the following governance steps are recommended as best practice, consistent with the general CSR governance framework under Section 135 of the Act and the CSR Rules:[3]

1. Review your company’s CSR Policy and consider amending it to include provisions for ZCZP deployment.
2. Obtain CSR Committee recommendation and Board approval for the updated CSR Policy.
3. Pass a Board Resolution authorising subscription to ZCZP instruments as part of your approved CSR activities.
4. Verify SSE registration of the target NPO prior to subscription. This is a mandatory threshold condition.
5. Subscribe to ZCZP instruments through the SSE platform and record the expenditure separately in CSR accounts.
6. Ensure appropriate disclosures are made in your Annual Report, CSR-2 filing, and on your company website in accordance with existing CSR disclosure requirements.[4]

What to Avoid

1. Do not exceed the 10% cap on ZCZP spend from your annual CSR obligation.
2. Do not subscribe to NPOs that are not registered with SEBI and listed on the Social Stock Exchange. Such subscriptions will not qualify as eligible CSR expenditure under this route.
3. Do not treat ZCZP subscriptions as investments or assets on your balance sheet. They are expenditure.
4. Do not skip Board and CSR Committee approval processes before subscribing.
5. Ensure disclosure obligations are met in a timely and accurate manner.

Penalties for Non-Compliance

The CSR penalty framework under the Act applies to the ZCZP route. Companies should be aware of the following:

1. Failure to spend the required CSR amount, including a breach of the 10% cap resulting in CSR under-deployment: governed by Section 135(7) of the Act,[5] which provides for a penalty of twice the unspent amount required to be transferred, or Rs. 1 crore, whichever is less, on the company; and a penalty of one-tenth of such amount or Rs. 2 lakhs, whichever is less, on every defaulting officer.
2. Non-compliance with Board Report requirements including CSR disclosures: governed by Section 134(8) of the Act, which prescribes a penalty of Rs. 3 lakhs on the company and Rs. 50,000 on every defaulting officer.[6] False or incorrect statements in the Board Report may additionally attract liability under Section 448 read with Section 447 of the Act.
3. Non-disclosure on company website: the obligation to display CSR policy and activities on the company’s website is prescribed under the CSR Rules.[7] The applicable penalty for non-disclosure should be verified against the relevant provisions.

   Additionally, the Registrar of Companies, SEBI (in relation to the SSE platform), and other regulatory authorities may take independent action. Given that Rule 4A has been inserted into the CSR Rules, ZCZP compliance will ordinarily fall within the scope of Secretarial Audit under Section 204 of the Act.[8]

Key Takeaways

1. The ZCZP route offers a regulated, structured channel for CSR deployment through capital market infrastructure.
   Companies should evaluate its suitability as part of their annual CSR planning. The 10% ceiling ensures it complements rather than replaces traditional CSR channels.
2. SSE registration of the NPO is a mandatory threshold condition.
   Subscription to non-SSE registered NPOs will not qualify as eligible CSR spend under this route. Companies must verify SSE registration prior to subscribing.
3. Board and CSR Committee governance procedures should be followed.
   While the amendment notification does not prescribe specific process requirements, the general CSR governance framework under Section 135 and the CSR Rules requires Board approval of CSR activities. Companies should ensure appropriate approvals are in place.
4. The Impact Assessment exemption is a meaningful operational benefit, but the 3-year project completion requirement imposes a monitoring obligation.
   Companies should conduct due diligence on the NPO’s project execution capacity before subscribing, and track project completion timelines.
5. Disclosure obligations under existing CSR frameworks continue to apply.
   Whether specific new disclosure obligations for ZCZP subscriptions have been introduced by the May 2026 notification should be verified from the official notification text.[9]

[2] The amendment notification of May 27, 2026 specifically inserts Rule 4A into the Companies (Corporate Social Responsibility Policy) Rules, 2014. The claim that a new Item (xiii) has simultaneously been inserted into Schedule VII of the Companies Act, 2013 could not be independently verified from the text of the notification. Readers are advised to confirm this directly with reference to the official Gazette notification before relying on the Schedule VII characterisation.

[3] Companies Act, 2013, Section 135(3) and Section 135(4): the CSR Committee is required to formulate and recommend a CSR Policy to the Board, and the Board is required to approve the Policy and ensure activities included therein are undertaken. See also Rule 5 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (as amended). The requirements to amend the CSR Policy, obtain CSR Committee recommendation, and pass a Board Resolution prior to ZCZP subscription are advisable governance steps consistent with this framework; they are not stated as express conditions precedent in the amendment notification of May 27, 2026.

[4] General CSR disclosure obligations are prescribed under Rule 9 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (as amended), read with Section 135(4)(b) of the Companies Act, 2013. The specific applicability of existing disclosure requirements to ZCZP subscriptions under the May 2026 amendment notification, and whether new standalone disclosure obligations have been introduced in this regard, should be verified from the official notification text.

[5] Companies Act, 2013, Section 135(7): a company in default of Section 135(5) (obligation to spend or transfer to the Unspent CSR Account) or Section 135(6) (obligation to transfer unspent funds to a Schedule VII Fund) shall be liable to a penalty of twice the amount required to be transferred, or Rs. 1 crore, whichever is less; and every officer in default shall be liable to a penalty of one-tenth of such amount, or Rs. 2 lakhs, whichever is less.

[6] Non-compliance with the requirements of the Board Report is governed by Section 134(8) of the Companies Act, 2013, which provides that the company shall be liable to a penalty of Rs. 3 lakhs and every defaulting officer to a penalty of Rs. 50,000. For false statements in the Board Report, see also Section 448 read with Section 447 of the Companies Act, 2013. The penalty figures stated in this article for false disclosure should be verified against the applicable provisions in force.

[7] Website disclosure obligations for CSR are prescribed under Rule 9(1)(b) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (as amended). The penalty for non-disclosure on the company website, as stated in this article, should be verified against the applicable penalty provisions of the Companies Act, 2013 and the CSR Rules.

[8] The amendment notification of May 27, 2026 does not expressly state that ZCZP compliance will form part of the Secretarial Audit scope. This observation is based on the general scope of Secretarial Audit under Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, which requires reporting on compliance with applicable provisions of the Companies Act and Rules thereunder. As Rule 4A has been inserted into the CSR Rules 2014 via the May 2026 amendment, compliance with the ZCZP framework would ordinarily fall within that scope.