Securities
Also written Security · Securities (definition adopted)
Financial 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.
In plain language
Someone with money to invest and someone who needs money can meet in two ways. They can strike a one-to-one deal on terms they negotiate between themselves — or they can use a standard security, whose terms both sides accept.
Securities are those standard instruments. The workbook defines them as financial instruments issued by companies, financial institutions or the government to raise funds, which investors buy to convert their savings into financial assets.
A security records the terms of exchange of money between two parties. It can be sold on to someone else, it comes with rights to information, and — once listed on an exchange — it can be turned back into cash when needed. That transferability is what the securities market is built on.
How it works
The legal definition. Section 2(h) of the Securities Contracts (Regulation) Act, 1956 defines securities to include:
| Included | |
|---|---|
| a | Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature, of a company, pooled investment vehicle or other body corporate |
| b | Derivatives |
| c | Units of a collective investment scheme |
| d | Security receipts under the SARFAESI Act, 2002 |
| e | Units of a mutual fund scheme — but not unit linked insurance policies |
| f | Units of a pooled investment vehicle |
| g | Certificates issued by a special purpose entity holding debt or receivables, including mortgage debt |
| h | Government securities |
| i | Instruments declared by the Central Government — including onshore rupee bonds of multilateral institutions such as the ADB and IFC, Electronic Gold Receipts and Zero Coupon Zero Principal instruments |
| j | Rights or interest in securities |
The two notifications to remember: Electronic Gold Receipts were declared securities by gazette notification of 24 December 2021, and Zero Coupon Zero Principal instruments by notification of 16 July 2022.
Features (section 1.2.1). Issuers set the terms; investors hold the rights those terms give — ownership, participation in management, or claims on assets. Securities broadly divide into equity and debt. Listing makes a security liquid and obliges the issuer to provide information about its performance. The market lets investors take risk for return, evaluate it with information, and transfer it by selling to someone willing to bear it.
A worked example
Illustrative holdings. Farhan, a 35-year-old engineer in Pune, lists what he owns:
| Holding | Value (Rs) | A security under Section 2(h)? |
|---|---|---|
| Shares of a listed company | 3,00,000 | Yes — clause (a) |
| Units of an equity mutual fund | 2,00,000 | Yes — clause (e) |
| A Government of India bond | 1,50,000 | Yes — clause (h) |
| Nifty call options bought (premium paid) | 60,000 | Yes — derivative, clause (b) |
| Electronic Gold Receipts | 40,000 | Yes — declared by notification, 24 December 2021 |
| A unit linked insurance policy | 1,00,000 | No — expressly excluded from clause (e) |
So Rs 7,50,000 of his Rs 8,50,000 sits in instruments that are securities under the SCRA.
Now take his Government of India bond as a security in action. It records a borrowing by the government, for a specific period, repaid at the end, with interest at a stated rate and frequency. Farhan can ask for information about the issuer, and if he no longer wants the risk he can sell the bond to another investor — transferring the risk along with the return.
Why NISM asks about it
Chapter 1 (Understanding Securities Markets and Performance) opens its substance with section 1.2 "Securities", reproducing the SCRA Section 2(h) list, followed by 1.2.1 "Features of Securities". Chapter 2 then divides securities into equity and debt. Expect a "which of these is not a security under SCRA?" question (the ULIP exclusion is the favourite), the Central Government's power to declare instruments as securities, and the equity/debt classification.
Common exam traps
- ULIPs are expressly excluded from the mutual-fund-units clause, even though they have an investment component.
- The Central Government can declare new instruments to be securities. EGRs (24 December 2021) and ZCZP instruments (16 July 2022) came in this way — they were not in the original list.
- Government securities are securities under the SCRA, even though their primary market is regulated by the RBI rather than SEBI.
- Derivatives are securities under the SCRA definition; the workbook adds that derivatives are created by exchanges.
- Issued to raise funds, bought to invest savings. The issuer's and investor's objectives are complementary.
- Equity and debt are the two broad classes; hybrids, commodities and structured products are treated separately as other asset classes.
Where this is taught
- Series V-D · Chapter 4: Legal and Regulatory Frameworkintroduced here
- Series XIX-D · Chapter 13: Taxationintroduced here
- Series XII · Chapter 1: Understanding Securities Markets and Performanceintroduced here
Related 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.
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Equity sharesOwnership in a company entitling holders to a share in profits and a vote on its affairs; equity holders are residual owners after all contractual claims, rewarded by dividend and capital appreciation.
- DerivativeA contract whose value is derived from the value of something else — the underlying — rather than from anything the contract itself owns or produces.
- Electronic Gold ReceiptAn electronic receipt issued against physical gold deposited under SEBI regulations, declared a "security" by the Central Government in 2021 — so buying and selling one is regulated the same way as trading a share.
- 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.
- Security ReceiptsA receipt issued by a SEBI-registered Asset Reconstruction Company against stressed loans it has acquired — one of the defined "special situation assets" a Special Situation Fund is permitted to invest in.
- Body corporateAn entity with a legal existence separate from the persons forming it, as defined in Section 2(11) of the Companies Act, 2013. Only a body corporate can register with SEBI as a portfolio manager.
- Securities marketThe market in which securities are issued, purchased by investors and subsequently transferred among investors — the regulated channel that moves household savings to businesses.