The Central Government has resorted to a unique recapitalisation exercise to provide Rs. 5,500-crore support to the Punjab & Sind Bank-a state owned bank.
- The Government has issued the lender Rs 5,500-crore worth of non-interest bearing bonds valued at par.
- These are special types of zero coupon bonds issued by the government after proper due diligence and these are issued at par.
- Only those banks, whosoever is specified, can invest in them, nobody else. It is not tradable, it is not transferable. It is limited only to a specific bank, and it is for a specified period.
- Though zero coupon, these bonds are different from traditional zero coupon bonds on one account — as they are being issued at par instead of on discount. Second, generally zero coupon bonds are tradable also but in the case of Punjab and Sind Bank, these bonds are not tradable.
How will it benefit the Bank?
- This unique recapitalization will facilitate the Punjab and Sind bank to use this capital to expand its banking activities for agriculture, rural and MSME sectors, with its prominent presence in Punjab, Haryana and Delhi, which account for nearly 900 out of its 1,500 branches.
What are Zero Coupon Bonds?
- Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount the investor will receive when the bond “matures” or comes due.
- The maturity dates on zero coupon bonds are usually long-term—many don’t mature for ten, fifteen, or more years.
- Investors can purchase different kinds of zero coupon bonds in the secondary markets that have been issued from a variety of sources.
