Debt security
Also written Debt instrument
A written agreement to repay a loan, usually with interest, within a set time. Bonds, debentures, CP, CDs, G-Secs and T-Bills are all debt securities, and any type can be admitted to the depository.
In plain language
A share makes you a part-owner. A debt security makes you a lender.
The workbook defines it as a written agreement to repay a loan, usually with interest, within a given time frame, and says it is also called a debt instrument. Depending on tenure, interest rate or the kind of issuer, debt securities come as bonds, debentures, commercial paper, government securities, treasury bills and more. They are further described as subordinate bonds, floating rate bonds, deep discount bonds, secured or unsecured debentures, zero coupon bonds, variable coupon bonds and so on.
Who issues what? Financial institutions and companies issue bonds, debentures and commercial paper. Governments, Central or State, issue government securities.
For a depository participant, the key idea is that any type of debt instrument can be admitted to the depository system. It does not matter whether it is listed, unlisted, privately placed or issued to a single holder. Once admitted, it is held and moved almost exactly like a share. The one real difference is that a debt security has a limited life.
How it works
From Chapter 11 (section 11.1).
Identification. Every debt security gets its own ISIN plus an instrument descriptor showing the issuer name, coupon rate, security name, redemption date and face value. The workbook decodes ICICI BANK LIMITED SR-B98 14.25 UMD 14FB05 FVRS1LAC as: issuer ICICI Bank Limited, coupon 14.25%, instrument Series B98 UMD, redemption 14/02/2005, face value Rs 1,00,000.
Admission. The issuer requests demat facility with a Letter of Intent. A tripartite agreement (depository, issuer, R&T Agent) or a bipartite one (depository and issuer) is signed, and the security becomes available for dematerialisation.
Key features a DP must watch:
| Feature | What it means in practice |
|---|---|
| Right ISIN | Instruments with otherwise identical features get separate ISINs if coupon, redemption date, put/call date, interest schedule or security differs |
| LOA vs debenture | Secured debentures are first allotted as a Letter of Allotment; once the charge is created, the ISIN's nomenclature changes from LOA to debenture |
| Time value of money | A credit received a day earlier earns a day's interest, so the execution date is crucial |
| Redemption | On redemption the ISIN is deactivated |
Allotment and income. New issues can be credited directly in demat form. Interest and redemption proceeds are paid by the issuer through its R&T Agent to the bank account linked to the demat account, or by warrant. A call option lets the issuer repay early; a put option lets the investor demand early repayment. Either only brings the redemption date forward.
Accounts and statements. No separate account is needed for debt instruments, and the DP issues no separate transaction statement. One statement covers every holding.
Short-term money market instruments (11.2, 11.3). The minimum for a certificate of deposit in the depository is Rs 1 lakh. Commercial paper has a face value of Rs 5,00,000 in the depository, so a Rs 5 crore investment shows as 100 units. Both are extinguished from investors' accounts through a corporate action on redemption.
A worked example
Illustrative holdings and rates; the rules are the workbook's.
Meenakshi, a Coimbatore investor, holds these in one demat account alongside her shares:
| Holding | Face value held | Identification |
|---|---|---|
| 8.10% secured NCD of XYZ Finance, maturing 2029 | Rs 5,00,000 | ISIN A |
| 8.25% secured NCD of XYZ Finance, maturing 2029 | Rs 3,00,000 | ISIN B — only the coupon differs, so a separate ISIN |
| Commercial paper of ABC Ltd | Rs 10,00,000 | 10,00,000 / 5,00,000 = 2 units |
The execution-date point. She sells Rs 50,00,000 face value of an illustrative 7.30% bond to a buyer, and the buyer's credit lands one day late. At simple interest on a 365-day year, one day's interest is 50,00,000 x 7.30% / 365 = Rs 1,000. That is the workbook's "time value of money" reason for treating the execution date on a debt transfer as crucial.
On redemption of the 8.10% NCD, the issuer's R&T Agent pays Rs 5,00,000 to the bank account linked to her demat account. ISIN A is then deactivated. She receives one transaction statement covering the shares, the NCDs and the CP together.
Why NISM asks about it
Chapter 11 (Special Services - Debt Instruments and Government Securities, 10% weightage) opens with the definition and then covers identification, admission, key features, allotment, interest and call/put options, before moving on to CDs, CP and G-Secs. Chapter 10 (7%) covers payment of interest on debt securities. Chapter 5 uses the phrase in the Basic Services Demat Account ceiling. Expect direct recall of the definition, "can privately placed debt be dematerialised?", and the LOA-to-debenture ISIN change.
Common exam traps
- Any debt instrument can be dematerialised — listed, unlisted, privately placed or held by a single holder.
- Same issuer, slightly different terms, different ISIN. A different coupon, redemption date, put/call date, interest schedule or security status is enough.
- The LOA ISIN is renamed, not replaced. On creation of the charge its nomenclature changes to that of a debenture.
- No separate account, no separate statement. Investors may keep debt in a separate account if they choose, but nothing requires it.
- Call = issuer's option; put = investor's option. Both only bring the redemption date forward.
- Who pays interest. For ordinary debt securities, the issuer or its R&T Agent pays. For government securities, the depository distributes interest after RBI credits it (Chapter 10).
- CD minimum Rs 1 lakh; CP face value Rs 5 lakh. Don't swap them.
- BSDA limit. A Basic Services Demat Account's Rs 10 lakh ceiling applies to debt and non-debt securities combined (Chapter 5).
- The descriptor example is historical. Its 2005 redemption date shows how descriptors are read. It is not a live security.
Where this is taught
- Series II-A · Chapter 3: Characteristics of Debt Securitiesintroduced here
- Series II-B · Chapter 3: Characteristics of Debt Securitiesintroduced here
- Series VI · Chapter 11: Special Services - Debt Instruments & Government Securitiesintroduced here
- Series V-D · Chapter 18: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Marketsintroduced here
Related terms
- Certificate of DepositA negotiable, unsecured money market instrument issued by a bank against funds deposited with it, sold at a discount and repaid at face value within one year.
- Commercial PaperA short-term, unsecured, discounted money market instrument through which eligible companies raise funds for 7 days to one year, issued in Rs 5 lakh multiples.
- Government SecurityA tradeable debt instrument issued by the Central Government or a State Government — treated as free of default risk, and the benchmark against which other rupee interest rates are priced.
- ISINThe 12-character code (ISO 6166) that identifies one specific security in the depository system — country prefix, nine-character basic number and a check digit, as in INE475C01012.
- Tripartite agreementThe agreement signed by the depository, the issuer and the issuer's R&T Agent before that issuer's securities can be admitted for dematerialisation — it is the contract that makes a scrip demat-eligible.
- Execution dateThe date on which a depository instruction is to take effect: a DIS debit waits till the end of that day for balance and then fails; for allotments and corporate actions, the day credits are made.
- Issuing & Paying AgentThe agent through which a commercial paper issue is allotted: it receives investors' demat details from the issuer, issues the IPA certificate and provides the allotment file used to credit CPs to demat accounts.
- Traded Debt SecurityA debt security a Category III AIF holds is "traded" on a given Valuation Day if trades in marketable lots were reported in it that day on a recognised stock exchange or the CCIL.
- Instrument descriptorThe human-readable string a depository uses alongside a debt security's ISIN, encoding the issuer name, coupon rate, security name, redemption date and face value in one line.
- Letter of AllotmentThe provisional instrument a company allots for a secured debenture before the charge over its assets is created — once the charge is created, the same ISIN's descriptor changes from LOA to debenture.
- SecuritiesFinancial instruments — shares, bonds, derivatives, mutual fund units, government securities and more — issued to raise funds, as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956.