The Indian Economy Blog

February 2, 2006

Zero-Coupon, Not Zero Knowledge

Filed under: Basic Questions,Capital markets — Prashant @ 9:50 am

Reader Raj Iyer sent us this article from the Economic Times titled How govt tries to dig out black money:

The government is examining the idea of issuing special bonds to mop up black money without offering any amnesty to the subscriber. The issue has been referred to the law ministry to ensure that such a scheme is legally foolproof, for the government has assured the Supreme Court that it will not come out with any overt amnesty scheme like the VDIS (Voluntary Disclosure of Income Scheme) to mop up black money.

The new scheme under examination entails the issuance of special bonds — zero-coupon bonds that can redeemed at par. Subscribers won’t be offered any interest, which has to be forfeited as a penalty for holding black money (emphasis ours).

Raj says: Perhaps someone needs to explain the ABCs of zero-coupon bonds to these reporters. It would be ok if this story were in the daily papers (such is the state of Indian journalism), but the Economic Times?!

Agree with Raj completely. I don’t know much about the pros and cons of various schemes to “mop” up black money, but do know a thing or two about bonds. Zero-coupon bonds are merely another means of structuring the cash flows from a bond. The non-interest payment is not a “penalty” of any sort. For a primer on zero-coupon bonds, check these useful sites, the SEC and the Bond-Market Association. Both are American organizations, but that is irrelevant. Zero-coupon bonds are the same worldwide.


  1. The government’s actions regarding black money are quite symmetrical. The biggest source of black money is politics and politicians, both through corruption and through the stupid policies they sometimes implement (like high stamp duties) that encourage others to resort to black money. Then, periodically, the same government works itself into a fit or moral outrage and offers an amnesty to legally launder black money into white money, always promising that this would be the last such amnesty.

    Given the repeated use of such amnesty schemes to launder money, most holders of black money (including in the political class and bureaucracy, not just businessmen) rationally expect that more amnesties will be offered in future. Hence, schemes such as this “zero coupon” one facilitate money laundering without (i) addressing the causes of black money and (ii) reducing the expectation that more schemes will be available in future to launder new black money. This is a wonderful system for the holders of black money to help themselves, and to posture in public with moral outrage that some people might be holding black money.

    It is unfortunate that Chidambaram, a sharp lawyer who knows this problem inside out, would even consider such a scheme. The most charitable explanation is that he is desperate for more money so is willing to get a few Rupees more upfront into the government’s coffers at the much higher long-term cost to the country from such stupid policies. Needless to say, such a scheme will make him more popular with those of his Cabinet colleagues who may take advantage of it to re-balance their portfolio from black to white money.

    Comment by Blue Sky — February 2, 2006 @ 9:01 pm

  2. I have to totally agree with the comments from Raj & your comment. The lack of knowledge & skills in the some of the men & women working in our pink dailies is appalling to say the least, especially those that cover the financial pages. A lot of them have just graduated either out college or journalism courses and have no underlying academic training to to appreciate how things are done. And based on my dealings with them, a few don’t even want to learn. I think that the colleges that offer mass communications degrees, should offer the students basic courses in business/finance/marketing etc.

    Comment by Aber — February 7, 2006 @ 3:37 am

  3. Is the government direly in need of money? I remember seeing something on rediff that said they are sitting on top of 150 crores not knowing what to do with it…

    Comment by Sabarish Sasidharan — March 13, 2006 @ 6:36 am

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