Registrars to an Issue and Share Transfer Agents — Corporate

Syllabus and chapter weightage

Weightages are taken from the official syllabus table published in the NISM workbook, so you can see exactly where the marks are.

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Sample questions

5 questions from the chapter tests, one per chapter. Pick your answer before you open the explanation.

1. Question 1 · Chapter 1: Introduction to Securities

   ________ capital is for perpetuity from the point of view of the company.

   1. A.Equity
   2. B.Debt
   3. C.Both debt and equity
   4. D.None of the above
   Show the answer

   Answer: A. Equity

   Equity capital cannot be taken out of the firm unless the firm is liquidated. Such capital is for perpetuity.

   And from the company's side: equity capital is for perpetuity. It cannot be redeemed and the company does not have an obligation to repay it.

   Debt is the opposite: debt has to be repaid by the company after a certain period. The period of repayment may be short-term (less than one year) or long-term (more than one year and may go up to even 30 years or more) and is decided at the time such funds are brought in.

   So option C fails — the two differ precisely on this point, which is one of the four bases on which capital is classified: the period for which money is contributed.

   The one exception on the equity side is narrow: in special situations, a company may buy-back its own shares from the shareholders. Such shares shall be extinguished by the company.

   Extinguished, not held — a buy-back reduces the capital rather than transferring it.

   Why perpetuity works for the investor at all. He is not trapped, because after IPO, the shares are listed on the stock exchanges, where they can be traded between one investor to another. This is called the secondary market, and secondary market provides liquidity to the investors.

   The company keeps the money; the investor can still exit.

   The other three bases of classification are the contributors of funds, the cost of the funds to the firm, and the rights that accrue to the contributors — under which equity investors enjoy rights such as ownership and voting rights and rights to share the profits of the company, while debt investors have the right to receive periodic interest and return of the capital on the expiry of the fixed period.

2. Question 2 · Chapter 2: Characteristic of Equity Shares

   ________ rights give the equity investor a say in the management of the company.

   1. A.Voting
   2. B.Dividend
   3. C.Both voting and dividend
   4. D.Transfer
   Show the answer

   Answer: A. Voting

   Investors are given voting rights which allow them to vote on important decisions taken by the company. The voting rights are in proportion to the number of shares held by the investor and allow them to express their views by voting 'For' or 'Against' a proposal.

   Voting is the mechanism of management participation — dividend is a return, not a say.

   Where the vote is exercised: the General Body Meeting of shareholders is the highest decision making authority in a corporate setup. Typically, a company will call a meeting of the shareholders once a year. This meeting is known as the Annual General Meeting (AGM). Shareholders have a right to attend the AGM of the company and participate in the proceedings.

   Note that the General Body Meeting outranks the board.

   What the dividend right actually is: ownership rights in a company also mean that the investors who hold equity shares are entitled to participate in the profits of the company. This participation will be in the form of dividends that are periodically declared by the company.

   A right to share profits, not to direct the business — which disposes of option C.

   Option D names a separate right. Ownership Transfer Rights mean that a company is not required to return the equity capital to the investor as it is perpetual in nature. However, investors can sell their shares to other investors who may want to buy the shares.

   The other rights listed: right to inspect documents related to company workings, right to legal recourse in case of mis-management or wrong disclosure, and sometimes Anti-dilution rights, which give an investor the right to maintain the same percentage ownership in a company by purchasing a proportional amount of shares in future when securities are issued.

   And not every shareholder wants the say. Retail investors, and to a great extent HNIs, are more interested in the returns... rather than in the control and management of the company, while large stake holders and institutional shareholders actively participate in the affairs of the company.

3. Question 3 · Chapter 3: Characteristics of Debt Securities

   ________ of a bond refers to the interest payable on a bond.

   1. A.Coupon
   2. B.Inflation rate on Principal
   3. C.Market Price
   4. D.Face Value
   Show the answer

   Answer: A. Coupon

   The coupon is the rate of interest to be paid by the borrower to the lender. This is a percentage that is applied to the face value or par value of the bond. The periodicity of interest payment (annual, semi-annual, quarterly or monthly) is also specified.

   Applied to face value — so option D names the base, not the interest itself. The face value or par value of the debenture is the amount of the principal that is due on each debenture at maturity, usually Rs. 100 or Rs. 1,000.

   Option C names something that moves. If the debt instrument is traded in the market before its maturity, the value at which such trade is executed is called the market value of the debt instrument. Market value may be higher or lower than the face value.

   And the market price does not change the coupon paid — a Rs. 100 bond with a 12 per cent coupon pays Rs. 12 whether it trades at Rs. 90 or Rs. 110.

   Option B describes only one special case. Inflation Indexed Bonds (IIB) are a category of floating rate bonds where the benchmark is the inflation rate — not the general term for a bond's interest.

   The three features of a bond: the principal, coupon (interest rate) and the maturity date of the bond.

   But note what the coupon does not tell you. The coupon rate of the bond is not an indicator of the returns on the bond, but merely helps in computing what cash flows would accrue periodically, to the investor — which is why the term 'yield', rather than 'coupon rate', is used to denote the returns to the investor.

   Not every bond has one: in a zero coupon bond, no coupons are paid or specified.

4. Question 4 · Chapter 4: Characteristics of Other Securities

   Warrants are usually issued along with ________.

   1. A.Debentures
   2. B.Equity shares
   3. C.Preference shares
   4. D.Mutual funds
   Show the answer

   Answer: A. Debentures

   Warrants may be traded on the stock exchange as a security separate from the debenture with which it was issued.

   The phrase "the debenture with which it was issued" settles it — a warrant is normally attached to a debenture, and may afterwards be detached and traded on its own.

   What a warrant is: warrants give the investors the right to buy shares of the company in the future. The number of shares that the warrant entitles the holder to subscribe to at a pre-determined date and price are specified at the time of issue.

   Option B confuses the warrant with what it produces. Exercising a warrant delivers equity shares — conversion/ exercise of the warrants results in increase in share capital — but the warrant is not issued alongside them.

   Why attaching a warrant helps a debenture issue. The debenture pays its coupon; the warrant adds the chance of equity gain, making the package attractive at a lower cost to the issuer — the same logic that lets convertible debentures carry a lower coupon rate than pure debt instruments.

   When it will actually be used: warrants will be exercised if the share price at the time of exercise is higher than the price at which the investors have the right/ option to buy the shares.

   Its resemblance to a derivative: warrants closely resemble options, but warrants usually have a longer lifetime as compared to options contracts.

   And a regulated use: warrants may be used by promoters to increase their stake in the company. Issue of warrants is subject to SEBI guidelines and shareholders' approval. The regulations include an upfront payment and a lock in on conversion.

5. Question 5 · Chapter 5: Basics of Mutual Funds

   The securities that a mutual fund scheme invests in depend upon its ________.

   1. A.Investment objective
   2. B.Investment style
   3. C.Investment plan
   4. D.Tax scenario
   Show the answer

   Answer: A. Investment objective

   A mutual fund will state its investment objective upfront. This indicates how the money will be invested and how the portfolio will be constructed. Investors choose a fund, which matches their own objectives.

   Stated upfront, before any money is collected — so the investor knows what he is buying into.

   And the fund manager is bound by it: fund managers invest the pool of money into securities such as equity and debt, according to the stated investment objective of the fund.

   The workbook's illustrations show how the objective determines the holdings. An equity fund may state that its objective is to invest in equity shares to generate long term growth, while a liquid fund may state that its objective is to generate reasonable return with high liquidity from investing in money market instruments over the short term.

   And in Example 1: ABC Income Fund is a debt fund that invests pre-dominantly in debt instruments, with the objective of generating regular income for its investors. ABCC Top 100 Fund is a fund that seeks to generate capital appreciation from a portfolio of equity shares of the 100 largest listed companies.

   Each name announces its objective, and the portfolio follows.

   Which is why the sequence runs as it does: usually a mutual fund product is first described by its investment objective. Investors then invest their money in the product. The money is pooled together and is invested according to the stated objective.

   Objective first, money second, portfolio third.

   And the objective determines the risk the investor takes on: the risk and return of the fund depend on the investment portfolio of the fund.

   One constraint applies to every scheme regardless of objective — mutual funds can invest only in marketable securities, or securities that can be traded in a market and therefore have a market price.

Frequently asked questions

What is the passing mark for NISM Series II-A?

You need 50% to pass NISM-Series-II-A: Registrars to an Issue and Share Transfer Agents — Corporate. On a 100-mark paper that is 50 marks.

Is there negative marking in NISM Series II-A?

There is no negative marking, so never leave a question blank — an uncertain guess costs you nothing.

How long is the NISM Series II-A exam?

The exam runs for 120 minutes and carries 100 marks in total.

How long is the NISM Series II-A certificate valid?

NISM certifications are generally valid for 3 years from the date of passing, after which they must be renewed. Confirm the current position on nism.ac.in before your certificate lapses.