On 17th April 2025, the Ministry of Finance, through the Central Board of Direct Taxes (CBDT), granted Housing and Urban Development Corporation Limited (HUDCO) permission to issue Ten-Year Zero Coupon Bonds worth Rs. 5000 Crore. This approval came as part of the Ministry’s push to raise funds for infrastructure development across the country. The bonds will have a tenure of ten years and one month, and HUDCO will issue five lakh bonds under this scheme.

The Zero Coupon Bonds are a significant instrument in the financial markets. Unlike regular bonds, these do not pay interest during their tenure. Instead, they are issued at a discounted price and are redeemed at face value upon maturity, which in this case will be Rs. 5000 Crore. The discounted amount is stated as Rs. 2,351.49 Crore, with the bonds maturing in March 2027. This structure enables HUDCO to raise substantial capital upfront while committing to repay the full amount after the bond's tenure.

The proceeds from the bond issue will be utilized exclusively for infrastructure projects that are deemed capable of generating sufficient revenue to service the debt, without relying on state government finances. This aligns with the government’s long-term focus on building sustainable infrastructure projects that can support themselves financially, enhancing the country’s infrastructure sector without additional burdens on the states.

The notification specifies that the funds raised from this bond issue can only be used for projects falling within the infrastructure sector as defined by the Ministry of Finance. This ensures that the bond proceeds are channeled into high-priority projects aimed at boosting national infrastructure. According to the notification, the bonds will be subject to terms set by the Ministry, including the issuance schedule and conditions for redemption.

As per the Income Tax Act of 1961, under Clause 48 of Section 2, these bonds qualify as zero coupon bonds. In the official Gazette notification (S.O. 1744(E)) issued by the Ministry, the detailed terms and conditions for the bond issuance were outlined. These include details regarding the time schedule for the bond issue, which is expected to occur on or before 31st March 2027, and instructions on the specific usage of the proceeds, including limitations on their application to infrastructure sectors only.

HUDCO, a Navratna CPSE under the Government of India, has had a strong track record of financing urban infrastructure projects. This move to issue bonds will further strengthen its ability to fund projects aimed at urban and rural development across India. It is expected that the bond issue will provide a significant boost to the infrastructure financing landscape, contributing to the nation’s economic growth and urban development.

The approval for the bond issuance is expected to have a positive impact on the Indian bond market, as it opens the doors for more similar government-backed projects. It is also anticipated to encourage other public sector enterprises (PSEs) to raise funds through such innovative financial instruments. The issuance of zero coupon bonds for infrastructure financing is seen as a smart move in ensuring sustainable growth while adhering to financial prudence.

In conclusion, the approval for HUDCO's issuance of Ten-Year Zero Coupon Bonds is a significant development in the Indian financial and infrastructure sectors. The move will not only provide HUDCO with much-needed funds but also pave the way for future infrastructure financing models in India. This initiative aligns with the government's broader objectives of developing infrastructure without placing additional burdens on the public finances, making it a key milestone for India’s financial ecosystem. The strategic use of zero coupon bonds in this context sets an example for future public sector enterprises looking for innovative ways to fund major projects.

This bond issuance is just the beginning, and its success may lead to further adoption of similar models across different sectors, especially infrastructure and development finance.

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