NISM Series II B Short Notes – Part 1: Introduction to Securities, Equity Capital & Debt Capital

NISM Series II B (Registrars to an Issue & Share Transfer Agent – Mutual Funds) is one of the important NISM certification courses regulated by SEBI (Securities and Exchange Board of India). If you are preparing for the NISM mutual fund exam, this is your go-to study material. This is Part 1 of our 6-part series of short notes covering the complete syllabus of the NISM II B certification examination.

In this post, we cover Introduction to Securities, features of equity capital, features of debt capital, hybrid structures, and the characteristics of equity shares — all topics that are directly asked in the NISM Series II B exam question bank.

Quick Answer (Featured Snippet): NISM Series II B is a SEBI-mandated certification for Registrars to an Issue and Share Transfer Agents (Mutual Funds). The exam tests your knowledge of securities markets, mutual fund operations, SEBI regulations, and investor services. Passing marks are 50% (50 out of 100) with a 2-hour exam duration.

What is NISM Series II B Certification?

The NISM Series II B – Registrars to an Issue & Share Transfer Agent (Mutual Funds) certification is mandatory for professionals working as Registrars and Transfer Agents (R&T Agents) in the mutual fund industry. It is conducted by NISM (National Institute of Securities Markets), which is an educational initiative of SEBI.

If you are looking for NISM study material or NISM Series II B study notes PDF, this complete 6-part short note series covers everything you need to clear the exam with confidence. You can also practice with our NISM Series II B mock test on PassNISM.in.

Chapter 1 – Introduction to Securities How Does a Business Raise Capital?

Every business needs money to operate. There are two primary ways a company raises capital:

Equity Capital – Contribution made by the owners or promoters of the business
Debt Capital – Funds borrowed from outside lenders

Capital used in a business can be classified on three major dimensions:

1. Contributors

Money brought in by promoters and business owners is called equity capital. To raise equity capital, the company offers equity shares to external investors who become shareholders. On the other hand, money received as a loan is called debt capital. Those who provide debt capital are known as lenders or creditors.

2. Time Period

The duration for which capital is available differs between equity and debt:

Equity capital is permanent in nature. It cannot be withdrawn from the business unless the company is dissolved (liquidated). It is said to be raised "in perpetuity."
Debt capital must be repaid after a fixed period. The repayment period can be short-term or long-term and is decided at the time the loan is taken.

3. Cost of Capital

Every business must pay a price for using capital:

For debt, a company pays periodic interest at a rate that is either pre-determined or linked to a benchmark rate.
For equity, the cost is variable and depends on company earnings — paid in the form of dividends and capital appreciation.

4. Rights of Contributors

Equity investors enjoy ownership rights, voting rights, and the right to share in profits (dividends).
Debt investors have the right to receive periodic interest and repayment of principal at maturity. Their claims may be secured against the company's assets.

Features of Equity Capital – Key Exam Points

Feature	Explanation
Limited Liability	Shareholders are not personally liable for company debts beyond their investment.
Face Value (Par Value)	Total equity is divided into small units of a fixed denomination called face value or par value.
Authorized Capital	Maximum equity a company can issue, as defined in its Memorandum of Association (MOA). Can be increased/reduced with shareholder approval.
Issued Capital	That portion of authorized capital which has been actually issued to investors.
Paid-up Capital	The portion of issued capital that has been fully paid by allottees. Investors pay via application money, allotment money, and call money.
Ownership Rights	Shareholders are part-owners of the company. Their ownership % is proportional to shares held.
Liquidity & Return	Equity shares are listed on stock exchanges and are transferable. Returns come through dividends and price appreciation. No guarantee of returns.

Features of Debt Capital – Key Exam Points

Here is what you need to know about debt capital for your NISM II B exam:

Debt capital refers to the borrowings of a company. Those who contribute debt are called lenders or creditors.
Companies raise debt by issuing debentures, bonds, commercial paper, or by taking bank loans.
Debt is raised for a fixed period after which the company must repay it.
The company pays periodic interest on the borrowed sum at a rate agreed upon at the time of borrowing.
Lenders may have rights over the company's assets if the company defaults. However, debt can also be unsecured, where no such asset-backed rights exist.

Hybrid Structures – Convertible Debentures & Preference Shares

Some financial instruments carry features of both equity and debt. These are called hybrid securities.

Convertible Debentures

Convertible debentures are debt instruments that pay periodic interest like regular debt. However, on a specified future date, they are converted into equity shares of the company. The conversion terms (number of shares, conversion price) are disclosed at the time of issue. Since investors also benefit from potential equity appreciation, these instruments typically carry a lower coupon rate than regular debt. At redemption, investors may choose to receive shares instead of cash.

Preference Shares

Preference shares offer a pre-determined rate of dividend, similar to debt. But they do not have a fixed maturity period or a charge over company assets like debt does. Key benefits:

Get priority in dividend payment over ordinary equity shareholders
Get priority in capital repayment if the company is wound up
Dividend is paid only when the company has sufficient profits
Voting rights may not be available to preference shareholders

Chapter 2 – Characteristics of Equity Shares Who Invests in Equity Shares?

A company can raise equity capital from multiple categories of investors:

1. Promoters

Promoters are the founding group of investors who set up the company and bring in initial capital. They take the earliest and highest risk. At the start, the entire control of the company is with the promoters. They bring in additional capital as and when needed.

2. Institutional Investors

Institutional investors include financial institutions, venture capital (VC) companies, mutual funds, foreign institutional investors (FIIs), and banks. These are professional investors with expertise to evaluate business risk and expected returns.

3. Public Investors

When a company lists its shares on a stock exchange through an Initial Public Offering (IPO), it moves from a closely held company to a publicly held company. Public investors can be:

Retail investors
High Net Worth Individuals (HNIs)
Non-institutional investors
Institutional investors

Features of Equity Share Capital Ownership Rights

Issuing equity shares means giving ownership rights to shareholders. Shareholders receive voting rights allowing them to participate in major company decisions.

Equity Capital is for Perpetuity

A company is not required to return equity capital to investors. Investors who want to exit can sell their shares in the secondary market (stock exchange). The company does not redeem equity shares.

Returns Are Not Guaranteed

Equity investments do not guarantee income. Returns come from:

Dividends — paid from company profits (not guaranteed)
Capital Appreciation — rise in share price (not guaranteed)

Risks in Equity Investing

Risk Type	Explanation
No Fixed Return	Dividend is neither fixed in amount nor in timing. It is paid only from profits and only when the management decides.
No Fixed Tenor	Equity is permanent (perpetual). Investors cannot demand money back from the company. They must sell on a stock exchange.
No Collateral Security	Equity is unsecured. In case of company liquidation, equity shareholders are paid last — after all creditors and debt holders.

Dividend from Equity Shares

Equity shareholders share in the residual profits of the company. Here are the key exam points on dividends:

Dividend is declared by the company from profits. It is not pre-fixed in percentage or timing.
Dividend is declared as a percentage of the face value of shares.
Final Dividend — declared at the end of the financial year.
Interim Dividend — declared during the year before final accounts are prepared.
The dividend yield of a share is inversely related to the share price. If share price rises, dividend yield falls, and vice versa.

Preference Shares vs. Equity Shares – Quick Comparison

Feature	Preference Shares	Equity Shares
Dividend Rate	Fixed (pre-determined)	Variable (depends on profits)
Voting Rights	Usually not available	Available
Priority in Dividend	Higher (paid before equity)	Lower (paid after preference)
Priority in Liquidation	Higher	Lowest (paid last)
Maturity	No fixed maturity (unless redeemable)	Perpetual

Rights Issue of Shares

A rights issue is a method by which an existing company raises additional equity capital from its existing shareholders. Important points:

The company must remain within its authorized capital limit when issuing new shares.
When new shares are issued, the proportionate holding of existing shareholders gets diluted (if they don't participate).
Rights shares are offered to existing investors in a certain ratio (e.g., 1 share for every 2 held), as approved by the board.
If all existing investors subscribe to the rights issue in full, their proportionate holdings remain unchanged even though issued and paid-up capital doubles.
Investors must subscribe by paying for the shares offered. They can also renounce their rights.

Quick Revision – Key Terms for NISM Series II B Exam

Equity Capital – Owner's contribution; permanent; no fixed return
Debt Capital – Borrowing; fixed period; fixed interest
Face Value / Par Value – The base denomination of a share
Authorized Capital – Maximum capital as per MOA
Issued Capital – Portion of authorized capital issued to investors
Paid-up Capital – Fully paid portion of issued capital
Convertible Debentures – Debt + equity hybrid; converts to equity on a future date
Preference Shares – Fixed dividend; priority over equity in dividends and liquidation
Rights Issue – Offer of new shares to existing shareholders in proportion to their holding
Dividend Yield – Inversely proportional to share price
Final Dividend – Declared at year end
Interim Dividend – Declared during the year

Internal Links – Continue Your NISM II B Preparation

This is Part 1 of 6 of our NISM Series II B Short Notes. These notes are prepared to help candidates pass the NISM mutual fund exam on their first attempt. For practice tests and question banks, visit PassNISM.in.