NISM Series IIA Short Notes – Part 1: Introduction to Securities (Equity & Debt)
Welcome to Part 1 of our 7-part short notes series for the NISM Series IIA – Registrar to an Issue and Share Transfer Agent (Corporate) Certification Exam. These notes are prepared to help you understand key concepts quickly so you can clear your NISM certification exam with confidence.
Whether you are looking for NISM study material, searching for NISM exam syllabus details, or want crisp revision notes before your exam, this series covers everything you need.
Quick Navigation: This is Part 1 of 7. For the complete series, visit our NISM Series IIA page on PassNISM.in. Chapter I – Introduction to Securities What Are Securities?
Securities are financial instruments that represent ownership, debt, or the right to ownership in a company or government entity. They form the backbone of capital markets in India and are regulated by SEBI (Securities and Exchange Board of India).
Understanding securities is the first step toward clearing any NISM certification exam. Let us break them down into their core categories.
Introduction to Equity Capital
Businesses are started by promoters who bring in the initial funds. As the business grows, additional capital may be required from outside sources. Capital used in running a business is classified based on four key dimensions:
- Contributors: Funds brought in by promoters and owners are called equity capital. It can be contributed by promoters at the start or later, and also by outside investors.
- Time Period: Equity capital is permanent — it cannot be withdrawn unless the firm is wound up (liquidated). Debt capital, on the other hand, must be repaid after a set period.
- Cost of Capital: Every business pays a price for using capital. Debt instruments usually carry a fixed periodic interest rate, while returns on equity are not guaranteed.
- Rights of Contributors: Equity investors enjoy ownership rights, voting rights, and the right to share in company profits. Debt holders are creditors with no ownership stake.
Features of Equity Capital – Key Points for NISM Series IIA Exam
| Feature | Explanation |
|---|---|
| Limited Liability | Equity shareholders are not personally liable to pay company debts if the company fails. Their maximum loss is the amount invested. |
| Face Value (Par Value) | The total equity capital is divided into smaller units called shares. Each share carries a face value (e.g., ₹10 or ₹2 per share). |
| Authorised Capital | The maximum equity a company can raise, as defined in its Memorandum of Association (MOA). |
| Issued Capital | The portion of authorised capital that has actually been offered to investors (promoters, public, or specific investors). |
| Paid-up Capital | The amount actually paid by investors. Payment may come in tranches: application money → allotment money → call money. |
| Ownership Rights | Shareholders are part-owners. Their ownership share is proportional to the number of shares they hold in the issued capital. |
| Perpetual Nature | Equity shares have no maturity date. Investors exit by selling on the stock exchange; the company does not redeem them. |
Features of Debt Capital
Debt capital refers to money a company borrows. Key characteristics include:
- Raised through instruments like debentures, bonds, and commercial paper
- Borrowed for a fixed period and must be repaid
- Carries a pre-fixed interest rate (coupon)
- Debt holders are creditors/lenders, not owners
- Secured lending gives lenders a right over company assets on default
- Debt instruments may be listed on stock exchanges for trading
- Provide pre-defined income at specific intervals and redemption proceeds at maturity
Hybrid Instruments – Combining Debt and Equity
Some instruments combine features of both equity and debt. These are called hybrid instruments.
1. Convertible Debentures
These are debt instruments that pay interest like regular bonds but convert into equity shares at a future date. The conversion terms — how many shares and at what price — are defined at the time of issue.
2. Preference Shares
Preference shares carry a pre-determined dividend rate like debt but do not have a fixed maturity or a right over company assets. They are given priority over ordinary equity shareholders in dividend payment and capital repayment during winding up. However, preference shareholders do not have voting rights in most cases.
Chapter II – Characteristics of Equity Shares Who Invests in Equity Shares?
A company raises equity capital for long-term needs. Three broad categories of investors participate:
1. Promoters
- Founders who set up the company and bring in initial capital
- Provide the risk capital that allows the business to leverage and withstand earnings fluctuations
- Typically retain majority shareholding to maintain management control
2. Institutional Investors
- Include Financial Institutions, Mutual Funds, Venture Capital Companies, Foreign Portfolio Investors (FPIs), Foreign Institutional Investors (FIIs), Qualified Foreign Investors, and banks
- Professional investors with expertise to evaluate risks and returns
- Shares may be allotted through private placement with lower regulatory requirements
3. Public Investors
- Include retail investors and High Net Worth Individuals (HNIs)
- Primarily interested in capital appreciation and dividends
- Generally do not actively exercise voting rights
Key Features of Equity Share Capital
- Ownership Rights: Shareholders get voting rights and share in company profits
- Perpetual Capital: The company does not repay equity. Investors exit through the secondary market (stock exchange)
- Returns Not Guaranteed: Dividend income and capital appreciation are both uncertain — neither is promised by the company
Risks in Equity Investing
| Risk | Explanation |
|---|---|
| No Fixed Return | Dividend is not guaranteed — it depends on the company's profitability and management decisions |
| No Fixed Tenor | Equity shares have no maturity date. Investors must sell on stock exchange to exit |
| No Collateral Security | Equity is unsecured. In liquidation, equity holders are paid last — after all creditors and debt holders |
Dividend from Equity Shares – Important Exam Points
- Dividend = share in residual profits of the company
- Declared as a percentage of face value of shares
- Not fixed — depends on profits available for distribution
- Final Dividend: Declared at the end of the financial year
- Interim Dividend: Declared during the financial year
- Dividend Yield = Dividend / Market Price of Share — inversely related to share price (if price rises, yield falls)
Preference Shares – Key Exam Points
- Carry a fixed dividend rate declared at the time of issue
- Priority over equity shareholders in dividend payment and capital repayment during winding up
- Dividend paid only if company has sufficient profits
- Generally no voting rights
- No fixed maturity and no right over company assets (unlike debt)
Rights Issue of Shares
A Rights Issue is when a company offers fresh shares to existing shareholders in proportion to their current holdings.
- Offered as approved by the Board of Directors
- After the issue, issued and paid-up capital increases but proportionate holdings remain the same (if all investors subscribe)
- Shareholders must pay for and buy the shares being offered
- A rights issue dilutes existing shareholders only if they do not subscribe
Quick Revision – Equity vs Debt vs Preference Shares
| Parameter | Equity Shares | Preference Shares | Debt (Bonds/Debentures) |
|---|---|---|---|
| Return | Variable (Dividend + Capital Gain) | Fixed Dividend Rate | Fixed Interest (Coupon) |
| Maturity | Perpetual (No maturity) | No fixed maturity | Fixed maturity date |
| Priority in winding up | Last (Residual) | Before equity, after debt | First priority |
| Voting Rights | Yes | Generally No | No |
| Security/Collateral | None | None | May be secured |
Internal Links – Explore More on PassNISM.in
- NISM Series IIA Short Notes – Part 2: Other Securities & Debt Instruments
- Part 3: Mutual Funds & SEBI Regulations
- NISM Series IIA Mock Test – Practice Now
- NISM Certification Courses – Full List
- How to Register for NISM Exam
Frequently Asked Questions (FAQs) What is NISM Series IIA exam about?
The NISM Series IIA exam tests candidates on their knowledge of securities markets, registrars to an issue, share transfer agents, depository services, and related regulations in India. It is mandatory for professionals working as R&T agents.
What is the difference between equity and preference shares?
Equity shares carry variable dividends and voting rights but rank last in liquidation. Preference shares carry a fixed dividend rate, have priority over equity in dividend payment and winding up, but generally carry no voting rights.
What is authorised vs issued vs paid-up capital?
Authorised capital is the maximum capital a company can raise (as defined in MOA). Issued capital is what has been offered to investors. Paid-up capital is the amount investors have actually paid.
What is a rights issue of shares?
A rights issue is an offer of new shares to existing shareholders in proportion to their current holdings. It allows the company to raise additional capital without diluting the proportional ownership of existing shareholders who subscribe.
Stay tuned for Part 2 of our NISM Series IIA Short Notes, where we cover Other Securities (Warrants, Convertible Debentures, DRs, FCCBs) and Debt Securities. Visit PassNISM.in for mock tests, question banks, and complete study material.