NISM Series IIA Short Notes – Part 2: Other Securities, Debt Instruments & Credit Rating

NISM Series IIA Short Notes – Part 2: Other Securities, Debt Instruments & Credit Rating

This is Part 2 of our 7-part NISM Series IIA – Registrar to an Issue and Share Transfer Agent (Corporate) short notes series on PassNISM.in. In Part 1, we covered equity capital, preference shares, and rights issues. Now we move on to other securities (Warrants, Convertible Debentures, Depository Receipts, FCCBs) and the important topic of Debt Securities.

Series Navigation: ← Part 1: Introduction to Securities | Part 3: Mutual Funds & SEBI Regulations → Chapter III – Other Securities 1. Warrants

Warrants are securities usually issued by companies together with a debenture to make a debt issue more attractive to investors.

• Give the holder the right to buy company shares in the future at a specified price
• The number of shares, the price, and the exercise period are all defined at the time of issue
• Warrants may be traded on stock exchanges separately from the debenture they accompanied
• Warrants have a longer lifetime (usually in years) compared to options contracts, which they closely resemble

2. Convertible Debentures

Convertible debentures are debt instruments that can be converted into equity shares at a future date. They have features of both debt and equity.

• Pay periodic coupon (interest) like a regular debt instrument
• Usually carry a lower coupon rate than pure debt because investors also benefit from potential capital appreciation after conversion
• At redemption, investors can choose to receive shares instead of cash
• Conversion terms (price, number of shares) are defined at the time of issue

3. Depository Receipts (DRs)

Depository Receipts are financial instruments that represent shares of a local Indian company but are listed and traded on a foreign stock exchange.

• Issued in foreign currency (usually US Dollars)
• Underlying equity shares are held with a custodian bank, which authorises the issue of DRs
• DRs can be converted into underlying equity shares depending on the terms of issue

Listing requirements differ across exchanges in terms of company size, financial health, shareholding pattern, and disclosure norms.

4. Foreign Currency Convertible Debentures (FCCBs)

FCCBs are foreign currency denominated debt (usually dollars) raised by Indian companies in international markets with an option to convert into equity shares before maturity.

• Interest and principal repayment are both in foreign currency
• Conversion price is usually set at a premium to the current market price of the shares
• Allow companies to raise debt at lower rates abroad
• The time taken to raise FCCBs is typically shorter than raising pure debt internationally

Chapter IV – Debt Securities

A debt security is a contract between the issuer (borrower/company) and the lender (investor) that defines the terms of borrowing. The key features of any bond are:

• Principal: The amount borrowed by the issuer
• Coupon: The rate of interest paid on the face/par value of the bond
• Maturity: The date on which the borrower must repay the principal

Types of Coupon Structures

Special Bond Types – Must Know for NISM IIA Exam Callable Bonds

The issuer has the right to redeem the bond before the original maturity date. Useful when interest rates fall — issuer can retire old high-interest debt and re-issue at lower rates.

Puttable Bonds

The investor has the right to seek early redemption from the issuer before maturity. Useful when interest rates rise — investor can sell the low-coupon bond and reinvest at higher rates.

Amortizing Bonds

The principal is repaid in instalments over the bond's life (not just at maturity). Each payment includes both principal and interest.

Asset-backed Securities (ABS)

Fixed income instruments created by pooling assets and issuing bonds that give investors a share of the cash flows from those assets.

Classification of Debt Instruments in India

Yield from Debt Instruments 1. Current Yield

Current yield compares the annual coupon to the bond's current market price.

Formula: Current Yield = (Annual Coupon / Market Price) × 100

Example: A bond with a 12% annual coupon trading at ₹109.50:
Current Yield = 12 / 109.50 = 10.95% 2. Yield to Maturity (YTM)

YTM is the total return an investor earns if the bond is held until maturity. It is the rate at which the present value of all future cash flows (coupons + principal) equals the current price of the bond.

• YTM accounts for coupon payments, capital gain/loss, and time value of money
• It is the most comprehensive measure of bond returns
• When market price = face value → YTM = coupon rate
• When market price < face value → YTM > coupon rate (bond at discount)
• When market price > face value → YTM < coupon rate (bond at premium)

Credit Rating – Critical for NISM Series IIA

The biggest risk in debt securities is the issuer failing to pay interest or repay principal. This is called credit risk. Credit rating agencies assess this risk.

Key Facts About Credit Rating Agencies in India

• Must be registered with SEBI and abide by SEBI (Credit Rating Agencies) Regulations, 1999
• Evaluate both qualitative (management quality, industry outlook) and quantitative (financial ratios) factors
• Appraisals done by industry experts using data from the borrower and independent sources
• A rating committee assigns a rating symbol that reflects the ability and willingness of the company to service the debt

Note for Exam: A credit rating converts complex financial analysis into a simple symbol (e.g., AAA, AA, A, BBB, etc.). Higher rating = lower credit risk = lower interest rate the company must offer. Quick Revision – Bond Features Comparison

Internal Links – Continue Your NISM Series IIA Preparation

• ← Part 1: Introduction to Securities (Equity & Debt Basics)
• Part 3: Mutual Funds & SEBI Regulations →
• NISM IIA Mock Test – Practice Free Questions
• NISM Exam Fees & Registration Details
• NISM Study Material PDF – Download Notes

FAQs – Debt Securities & NISM Series IIA What is the difference between a callable and a puttable bond?

A callable bond gives the issuer the right to repay the bond early. A puttable bond gives the investor the right to demand early repayment. Both are early redemption options but from opposite sides.

What is a Zero Coupon Bond or Deep Discount Bond?

A zero coupon bond pays no periodic interest. It is issued at a steep discount to its face value and redeemed at face value at maturity. The difference between issue price and face value is the investor's return.

What is the CBLO instrument?

CBLO stands for Collateralised Borrowing and Lending Obligation. It is created using government securities as collateral, held with CCIL, and used by banks to borrow from mutual funds and insurance companies for maturities from one day to one year.

Why do corporate bonds need to be credit rated?

SEBI regulations require public issues of corporate debt to be credit rated. A credit rating helps investors assess the credit risk (risk of default) of a bond and compare it with other investment options. Higher rated bonds typically offer lower returns due to lower risk.

Continue to Part 3: Mutual Funds & SEBI Regulations for the next section of your NISM Series IIA preparation. All 7 parts are available on PassNISM.in.