Letter of Allotment
Also written LOA · Letter of Allotment (LOA)
The 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.
In plain language
A secured debenture is only truly "secured" once a charge over the company's assets actually exists. Between allotment and that charge being created, the investor does not hold a debenture certificate at all — the workbook has the company issue something else in the interim: a Letter of Allotment (LOA).
The LOA is not a separate, lesser security running alongside the debenture. It is the same instrument at an earlier stage — the depository simply relabels it once the charge is created.
How it works
From Chapter 11, section 11.1 (Key features — differentiating LOA and debenture certificates): on issue of secured debentures, the Issuer initially allots a Letter of Allotment, which continues until the charge over the relevant assets is created. The depository allots an ISIN to the LOA itself.
On creation of the charge, debenture certificates are issued in lieu of the LOA, and the ISIN's descriptor nomenclature changes from LOA to that of a debenture — the workbook's own worked example shows the descriptor for an LOA ISIN, "KMPL 9.5 LOA 29DC05 FVRS1LAC," changing to "KMPL 9.5 NCD 29DC05 FVRS1LAC LOA UPTO 23MR05" once the charge is created. The ISIN number itself does not change — only its descriptor is updated to reflect the instrument's new status and to record how long the LOA stage ran.
A worked example
Krishna Mills Pvt Ltd (KMPL) issues a 9.5% secured NCD, redeemable 29 December 2005, face value Rs 1,00,000. At allotment, before the charge over KMPL's assets is created, investors receive a Letter of Allotment, carrying the descriptor "KMPL 9.5 LOA 29DC05 FVRS1LAC."
On 23 March 2005, KMPL creates the charge over the relevant assets. From this point, the same ISIN's descriptor is updated to "KMPL 9.5 NCD 29DC05 FVRS1LAC LOA UPTO 23MR05," and the instrument is now a proper secured debenture certificate, not an LOA.
An investor holding the LOA throughout this period never had to submit any fresh demat request — the same ISIN carried them through both stages; only the descriptor and the underlying instrument's legal character changed.
Why NISM asks about it
Chapter 11, section 11.1, lists the LOA-to-debenture change as one of the specific "key features" a DP must watch when handling debt instruments. Expect a question on when an LOA converts (creation of the charge, not on redemption or on a fixed date) and on the fact that the ISIN itself is unchanged even as the descriptor updates.
Common exam traps
- The LOA converts to a debenture on creation of the charge — not on allotment, and not on a fixed calendar date.
- The ISIN does not change when an LOA becomes a debenture — only the descriptor's wording is updated.
- An LOA is issued only for secured debentures — the workbook ties this specifically to the charge-creation process, which applies to secured instruments.
Check yourself
1.What is the maturity period of Treasury Bills?
- a)Up to one year
- b)Up to 3 months
- c)Up to 6 months
- d)More than 10 years
Show the answer
Answer: (a) Up to one year
Treasury Bills have a maturity period of up to one year.
The contrast the exam always draws is with Dated Securities, which have a maturity period of more than one year. Learn them as a pair — one year is the dividing line, and every question on this point turns on which side of it you are.
Options B and C are plausible because treasury bills in practice are issued in 91-day, 182-day and 364-day tenors. But the workbook does not set a three-month or six-month ceiling; it sets one year. Option D describes long-dated government stock, which falls under Dated Securities.
Both belong to the family the workbook lists: Dated Securities, Treasury Bills, Sovereign Gold Bonds, Floating Rate Bonds, Inflation Indexed Bonds, all issued by RBI.
2.Why does the workbook say the execution date is crucial when executing a transfer instruction for a debt instrument?
- a)Because debt instruments bear interest, and receiving the credit a day earlier results in earning one day's interest
- b)Because debt instruments can be transferred only on their interest payment dates
- c)Because the ISIN of a debt instrument changes every day
- d)Because a transfer after the execution date requires fresh admission of the instrument
Show the answer
Answer: (a) Because debt instruments bear interest, and receiving the credit a day earlier results in earning one day's interest
Under "Time value of money" the workbook says: "Debt instruments bear interest. Receiving the credit of a debt instrument into demat account a day earlier, will result in earning one-day interest. Therefore, the execution date is crucial while executing any transfer instruction for debt instrument."
- B invents a restriction. The manner of operation of debt instruments in the depository is identical to that followed for the equity segment; the only difference is that a debt instrument has a limited life.
- C is wrong: an ISIN does not change daily. It changes nomenclature when an LOA becomes a debenture on creation of charge, and it is de-activated on redemption.
- D has no basis. Admission is a one-time process for the instrument.
3.Within what time must a DP scan a used DIS and upload the scanned image, tagged to the correct DIS serial number, into the NSDL/CDSL system?
- a)On the same day, without exception
- b)Immediately, but not later than two days
- c)Within seven days
- d)Within one month
Show the answer
Answer: (b) Immediately, but not later than two days
Under SEBI Circular No. CIR/MRD/DP/01/2014 dated January 07, 2014, DPs must scan the DIS and tag it to the correct DIS serial number while uploading the scanned image in the NSDL/CDSL system immediately but not later than two days.
The depository issues a report listing DIS used for transactions whose scanned image was never uploaded, and failure to scan and upload within the prescribed time attracts a penalty as per a pre-defined penalty structure.
These guidelines are effective from October 1, 2014 — a separate date the exam sometimes asks for on its own.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Debt securityA 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.
- 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.
- 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.