Securities Intermediaries Compliance (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

   The financial system consists of banks, non-banks and what else?

   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 — the market, the instruments and the intermediaries — and it is the financial market that the question is after.

   What the system is for: the entire set of institutionalized arrangements by which funds are transferred from surplus units to deficit units at terms acceptable to both sides, where households as a sector represent the surplus unit, whereas corporations and governments collectively represent deficit units.

   And its purpose: to gather or pool money from surplus units i.e., people and businesses that have more than they need currently and transmit or allocate those funds to deficit units i.e., those who can use them for investment.

   The pay-off is economy-wide: a larger flow of funds and efficient allocation of them leads to better economic output and welfare of the economy and society.

   Options B, C and D are not components of the system as the chapter defines it. Bullion is not even a security under the SCRA; money lenders and NGOs are not part of the institutional architecture described — though note that a Not for Profit Organisation may now issue zero coupon zero principal instruments registered with the Social Stock Exchange segment of a recognised Stock Exchange.

   The financial market itself is the market in which financial assets such as equities, bonds, currencies and derivatives are created or transferred, and it must function efficiently and at a minimal cost in cooperation with the other constituents of the financial system.

   Its subtypes are five — money market, capital market, forex market, credit market and insurance market.

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

   Which of the following is an unhealthy practice in the securities markets?

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

   Answer: A. Insider trading

   The chapter names the abuses directly: 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.

   The other three options are the cure, not the disease. What is paramount is to ensure that investors make informed decisions on the basis of complete transparency and fairness in both primary and secondary market transactions, and companies and mutual funds issuing securities and units ought to furnish adequate disclosures on all relevant facts.

   Surveillance is how a regulator detects the abuses; disclosure and transparency are how they are prevented.

   Why insider trading is treated so seriously: deliberately engineered speculative activities in the stock market or insider trading are undesirable as they can hurt investors at large.

   And SEBI's functions include it expressly — under section 11(2) SEBI is empowered to prohibit insider trading in securities and to prohibit fraudulent and unfair trade practices relating to the securities market.

   Section 11(2A) even allows inspection of a listed company's records where SEBI has reasonable grounds to assume that the concerned company has been indulging in insider trading or fraudulent and unfair trade practices.

   The whole apparatus of this chapter exists for the three objects: to protect the interest of investors in securities markets · to promote the development of securities markets · to regulate the securities markets.

   The detailed insider trading regime is the SEBI (Prohibition of Insider Trading) Regulations, 2015, under which an insider is any person who is connected with a company or who is in possession of or as having access to unpublished price sensitive information.

3. Question 3 · Chapter 3: Introduction to Compliance

   Primarily, compliance involves what?

   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.

   That is the definition; the other options are the means. 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 — so record keeping and reporting are among the actions by which compliance is achieved, not what compliance is.

   In the securities market the definition is fuller. Compliance 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.

   Four sources of obligation — SEBI, exchanges, depositories, and the firm's own board. A firm can be within SEBI's rules and still non-compliant with its exchange's bye-laws or its own board policy.

   IOSCO put the function this way in 2005: a function that, on an on-going basis, 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.

   Fraud prevention (option D) is a consequence rather than the definition — though compliance looks into the different aspects of the culture and ethics of a market intermediary and is an important tool in managing the risk of legal or regulatory sanctions, financial loss, or loss to reputation.

4. Question 4 · Chapter 4: SEBI Act 1992

   Which of the following is NOT a function of SEBI under the SEBI Act, 1992?

   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 function is stated as regulating the business in stock exchanges and any other securities markets — both, not one to the exclusion of the other. So the option excluding stock exchanges misstates it.

   The other three are express functions: promoting and regulating self-regulatory organisations · regulating substantial acquisition of shares and take-over of companies · prohibiting insider trading in securities.

   The full list runs to fifteen measures, also including registering and regulating the stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, as well as depositories and its participants, custodians of securities, foreign institutional investors, credit rating agencies; registering and regulating Venture Capital Funds and other Collective Investment Schemes, including mutual funds; prohibiting fraudulent and unfair trade practices relating to securities markets; promoting investors' education and training of intermediaries; calling for information, inspection, inquiries and audits; exchanging information with authorities whether in India or outside India; exercising delegated Securities Contracts (Regulation) Act, 1956 powers; levying fees or other charges; conducting research; and performing such other functions as may be prescribed.

   All of it serves the preamble — the Act was enacted "to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto".

   And note how wide the information power is: SEBI may call for information from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act.

5. Question 5 · Chapter 5: SCRA 1956 and SCRR, 1957

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

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

   Answer: A. 2 years

   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.

   The five-year list is separate. 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.

   A simple way to hold the split. The five-year items are the books of the business — its ledgers and registers. The two-year items are the paperwork of individual transactions — contract books, contract note counterfoils and client consents.

   And five years is the statutory ceiling. Section 6(2) of SCRA requires every member of a recognized stock exchange to maintain and preserve for such periods not exceeding 5 years such books of accounts and other documents as the Central Government may prescribe, and those records are subject to inspection by SEBI.

   Failure to maintain them is penalised under section 23A at not less than one lakh rupees... to one lakh rupees for each day... subject to a maximum of one crore rupees.

Frequently asked questions

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

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

Is there negative marking in NISM Series III-C?

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-C exam?

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

How long is the NISM Series III-C 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.