Securities Intermediaries Compliance (Non-Fund)

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.

Every chapter can be read free, no account needed — tap a chapter to open its plain-English Foundation lesson.

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 the Financial System

   Financial systems consist of banks, non-banks and ______________.

   1. A.Financial markets
   2. B.Bullion markets
   3. C.Money lenders
   4. D.NGOs
   Show the answer

   Answer: A. Financial markets

   An efficient financial system plays an important role in economic development and it consists of financial market, financial instruments and financial intermediaries.

   Three components — market, instruments, intermediaries — and the market is the one the question is looking for.

   What the system is for: the Financial System refers to the entire set of institutionalized arrangements by which funds are transferred from surplus units to deficit units at terms acceptable to both sides.

   Option B names a commodity market. Gold is not even a security under the SCRA — only the Electronic Gold Receipt is, which is why the fourth review question excludes bullion from the definition.

   Option C names informal lenders, who lie outside the institutionalised arrangements the definition describes.

   Option D names organisations that may raise money — the Social Stock Exchange exists precisely to register Not for Profit Organizations (NPOs) and/or list the securities issued by them — but an NPO is a user of the system, not a component of it.

   Why the market is indispensable. A Financial Market can be defined as the market in which financial assets such as equities, bonds, currencies and derivatives are created or transferred. It is a mechanism that allows traders to deal in financial securities, commodities, etc., at low costs, which reflects the efficiency of the market.

   Created or transferred — the primary and secondary segments in four words.

   And the whole system is judged by two things: a larger flow of funds and efficient allocation of them leads to better economic output and welfare of the economy and society.

   Volume and accuracy. The chapter adds a third consideration — the market should function efficiently and at a minimal cost.

2. Question 2 · Chapter 2: Regulatory Framework - General View

   Unhealthy practice in the securities markets includes which of the following?

   1. A.Insider trading
   2. B.Disclosure
   3. C.Transparency
   4. D.Surveillance
   Show the answer

   Answer: A. Insider trading

   There can be instances of unethical activities which can be detrimental to investors in general such as insider trading, misusing the power of attorney given by investors to brokers, price manipulation, front running, etc.

   Four named abuses, of which insider trading heads the list.

   Options B, C and D are all remedies, not diseases. The purpose of regulation is stated as ensuring that investors make informed decisions on the basis of complete transparency and fairness in both primary and secondary market transactions.

   Disclosure is expressly required: companies and mutual funds issuing securities and units ought to furnish adequate disclosures on all relevant facts.

   Transparency is the stated standard, and surveillance is how a regulator detects the abuses — SEBI is empowered to require disclosure of information, to undertake inspection, conduct inquiries and audits of stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and SROs.

   Why insider trading is singled out. Deliberately engineered speculative activities in the stock market or insider trading are undesirable as they can hurt investors at large. It defeats the very premise of an informed market — as Chapter 2's account of the PIT Regulations puts it, any trading done by an insider based on information that is not available in the public domain gives an undue advantage to insiders and affects market integrity. This is not in line with the principle of fair and equitable disclosure.

   And SEBI has an express mandate against it: among its section 11(2) functions is to prohibit insider trading in securities, alongside the power to prohibit fraudulent and unfair trade practices relating to the securities market.

   The three objectives that frame it all: to protect the interest of investors in securities markets · to promote the development of securities markets · to regulate the securities markets.

3. Question 3 · Chapter 3: Introduction to Compliance

   Primarily, compliance involves _____________.

   1. A.Conforming to a rule, policy, standard or law
   2. B.Record keeping
   3. C.Reporting
   4. D.Preventing frauds
   Show the answer

   Answer: A. Conforming to a rule, policy, standard or law

   In general, compliance means conforming to a rule, such as a specification, policy, standard or law.

   The definition is given in exactly those words.

   Options B and C name two of the five actions, not the meaning. The set of actions include maintenance of records, adoption of policies and procedures, preparation of reports, taking actions and making submissions to the competent authorities.

   Record keeping and reporting are how compliance is achieved — they are not what compliance is.

   Option D names a consequence. Preventing frauds is one benefit of a compliant firm, but compliance is broader: it is an important tool in managing the risk of legal or regulatory sanctions, financial loss, or loss to reputation resulting from the violation of regulatory requirements.

   What the definition means in this market specifically: compliance however means a set of actions by which registered intermediaries in securities markets and issuer companies need to comply with the rules and regulations, notifications, guidelines and instructions issued by the Securities and Exchange Board of India (SEBI), the stock exchanges, depositories with whom the intermediary has taken membership, as well as policies laid down by the Board of Directors (BoD) of the Company and other competent authorities.

   Five sources of obligation — and note that the company's own board is one of them. Compliance is not only about external rules.

   Who carries it out: the Compliance Officer (CO), described as the first line regulator, and IOSCO's definition captures the work as a function that identifies, assesses, advises on, monitors and reports on a market intermediary's compliance with securities regulatory requirements, including whether there are appropriate supervisory procedures in place.

4. Question 4 · Chapter 4: Securities and Exchange Board of India Act, 1992

   All of the following are functions of SEBI under the SEBI Act, 1992, EXCEPT:

   1. A.Regulating the business in other securities markets but not in stock exchanges
   2. B.Promoting and regulating self-regulatory organisations
   3. C.Regulating substantial acquisition of shares and take-over of companies
   4. D.Prohibiting insider trading in securities
   Show the answer

   Answer: A. Regulating the business in other securities markets but not in stock exchanges

   The exception lies in the exclusion, not the inclusion.

   a. Regulating the business in stock exchanges and any other securities markets.

   Stock exchanges are expressly named — so a statement that SEBI regulates other markets but not stock exchanges misdescribes the function.

   The other three appear verbatim in the list:

   d. Promoting and regulating self-regulatory organisations.

   h. Regulating substantial acquisition of shares and take-over of companies.

   g. Prohibiting insider trading in securities.

   Why stock exchanges must be included. They are the venue of the secondary market, and much of the Act depends on SEBI's reach over them — under Section 11(4) it may suspend the trading of any security in a recognised stock exchange and suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position, and it may exercise such powers under the provisions of the Securities Contracts (Regulation) Act, 1956 as may be delegated to SEBI by the Central Government.

   The full list of measures runs to fifteen heads, also covering registration of intermediaries from stockbrokers, sub-brokers, share transfer agents, bankers to an issue through to depositories and its participants, custodians of securities, foreign institutional investors, credit rating agencies · Venture Capital Funds and other Collective Investment Schemes, including mutual funds · prohibiting fraudulent and unfair trade practices · promoting investors' education and training of intermediaries · inspections and inquiries · exchange of information whether in India or outside India · levying fees · and conducting research.

   All of it serves the preamble — to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.

5. Question 5 · Chapter 5: Securities Contracts (Regulation) Act, 1956 and Securities Contracts (Regulation) Rules, 1957

   As per the SCRR, trading members must maintain counterfoils or duplicates of contract notes issued to clients for how many years?

   1. A.2
   2. B.3
   3. C.5
   4. D.7
   Show the answer

   Answer: A. 2

   Rule 15(2) requires every member of a recognized stock exchange to maintain and preserve the following documents for a period of 2 years: Member's contract books showing details of all contracts entered into by the member with other members of the same exchange or counterfoils or duplicates of memos of confirmation issued to such other members · Counterfoils or duplicates of contract notes issued to clients · Written consent of clients in respect of contracts entered into as principals.

   Three documents, two years.

   Option C states the other period. Under Rule 15(1) every member of a recognized stock exchange is required to maintain and preserve the following books of account and documents for 5 years: Register of transactions (Sauda book) · Clients' ledger · General ledger · Journals · Cashbook · Bank pass-book · Documents register showing full particulars of shares and securities received and delivered.

   Seven records, five years.

   The distinction is between ledgers and tickets. The five-year list reconstructs the business over time; the two-year list evidences individual transactions.

   And there is a third figure in the chapter, easily confused. Section 6(2) of SCRA requires every member of a recognized stock exchange to maintain and preserve for such periods not exceeding 8 years such books of accounts and other documents as the Central Government may prescribe.

   Eight years is a ceiling on what may be prescribed, not a period anyone actually keeps.

   Whatever the period, the records are open to the regulator: such books of accounts and other documents shall be subject to inspection by SEBI.

   And failing to keep them is penalised. Section 23A covers failure to maintain books of account or records as per the listing agreements, conditions or bye-laws of a recognised stock exchange, at not less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.

Frequently asked questions

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

You need 60% to pass NISM-Series-III-A: Securities Intermediaries Compliance (Non-Fund). On a 100-mark paper that is 60 marks.

Is there negative marking in NISM Series III-A?

There is negative marking of 25% of the marks for that question, so a wrong answer costs you 0.25 marks on a 1-mark question. Guess only when you can eliminate at least two options.

How long is the NISM Series III-A exam?

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

How long is the NISM Series III-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.