NISM Series II-B · Chapter 4: Characteristics of Other Securities

L1 · Foundation

Characteristics of Other Securities

Warrants and when they are exercised, convertible debentures and their conversion terms, depository receipts with the ADR, GDR and IDR distinction, foreign currency convertible bonds, ETFs and index funds with the comparative table, and REITs and InvITs with their minimum sizes.

18 min read · Worth 4% of the paper · Written from pages 42–48 of the official NISM workbook · Updated 18 September 2026

What this chapter covers

Units 1 to 5 carry 20 marks between them — about 4 marks for this chapter.

Learning Objectives: After studying this chapter, you should know about other types of securities such as: Warrants · Convertible Debentures (CDs) · Depository Receipts (DRs) · Foreign Currency Convertible Bonds (FCCBs) · Exchange Traded Funds (ETFs) and Index Funds · Real Estate Investment Trusts (REITs) · Infrastructure Investment Trusts (InvITs)

Companies raise capital using equity and debt instruments. The basic features of these instruments can be modified to suit the specific requirements of the borrowers or lenders. Such modifications bring advantages such as wider participation, better management of cash flows and better return prospects.

Three advantages — wider participation, better cash flow management, better return prospects.

4.1 Warrants

Warrants give the investors the right to buy shares of the company in the future. The number of shares that the warrant entitles the holder to subscribe to at a pre-determined date and price are specified at the time of issue.

The first sample question tests this — a warrant is a right to subscribe to the equity shares of a company.

Conversion/ exercise of the warrants results in increase in share capital. Warrants may be traded on the stock exchange as a security separate from the debenture with which it was issued. Warrants usually have a longer lifetime as compared to options contracts which they closely resemble.

The workbook defines the comparison: options refer to a type of derivatives contract that gives buyer the right to exercise the option to buy or sell the underlying security at a pre-defined date and price.

When a warrant is exercised

Warrants will be exercised if the share price at the time of exercise is higher than the price at which the investors have the right/ option to buy the shares.

For example, assume a warrant enables an investor to buy an equity share of a company at Rs.100. The warrant will be exercised: (a) when it is due to be exercised, (b) if the price of the share in the market is more than Rs.100. If the market price is less than Rs.100, the investor can always buy from the market, rather than use the option to buy the same share at a higher price.

Nobody pays Rs. 100 for something selling at Rs. 90.

Warrants may be used by promoters to increase their stake in the company. Issue of warrants is subject to SEBI guidelines and shareholders' approval. The regulations include an upfront payment and a lock-in on conversion.

4.2 Convertible debentures

Convertible debentures are debt instruments that can be converted into equity shares of the company at a future date. The security has features of both debt and equity. It pays periodic coupon interest till the date of redemption/ conversion into equity shares, just like any other debt instrument.

At the time of redemption of the debenture, the investors can choose to receive shares of the company instead of cash redemption.

What the issuer must specify

The issuer specifies the details of the conversion at the time of making the issue. This will include:

The date on which the conversion will be made

The ratio of conversion i.e. the number of shares that the investor will be eligible to get for each debenture

The price at which the shares will be allotted to the investor on conversion. Usually this is at a discount to the market price

The proportion (full or part) of the debenture that will be converted into equity shares. Accordingly, the debenture may be referred to as Fully Convertible Debenture (FCD) or Partly Convertible Debenture (PCD) or Non-Convertible Debenture (NCD).

Four items — date, ratio, price, and proportion.

Abbreviation	Meaning
FCD	Fully Convertible Debenture
PCD	Partly Convertible Debenture
NCD	Non-Convertible Debenture

Why they cost the issuer less

The advantage to the issuer of convertible debenture lies in the fact that convertible debentures usually have a lower coupon rate than pure debt instruments. This is because the yield to the investor in such debenture is not only from the coupon alone but also the possibility of capital appreciation in the investment once the debentures are converted into equity.

Moreover, the issuer does not have to repay the debt on maturity since shares are issued in lieu of repayment, thus saving cash outflow. The interest rate on a convertible debenture is usually lower than the interest on a non-convertible debenture.

When a convertible debenture is converted into equity both the interest and the principal are no longer payable.

Both obligations vanish on conversion.

And the cost falls on the existing owners: the shareholding percentage of the existing shareholders gets diluted when fresh shares are issued on conversion. Thus, convertible debentures are normally issued on rights basis or with specific approval of existing shareholders. Issue of convertible debentures is governed by SEBI Regulations.

4.3 Depository Receipts

Depository receipts (DRs) are financial instruments that represent shares of a local company but are listed and traded on a stock exchange outside the country. DRs are issued in foreign currency, usually in US Dollars. DRs allow overseas investors to easily invest in a company.

To issue a DR, a specific quantity underlying equity shares of a company are lodged with a custodian bank, which authorises the issue of depository receipts against the shares. Depending on the country of issue and conditions of issue, the DRs can be converted into equity shares.

The third sample question tests this — the underlying stocks are held by the depository bank or local custodian.

ADR, GDR and IDR

DRs are called American Depository Receipts (ADRs) if they are listed on a stock exchange in the USA such as the New York Stock Exchange or NASDAQ. If the DRs are listed on a stock exchange outside the US, they are called Global Depository Receipts (GDRs). The listing requirements of stock exchanges can be different in terms of size of the company, state of its finances, shareholding pattern and disclosure requirements.

When DRs are issued in India and listed on stock exchanges in India with foreign stocks as underlying shares, these are called Indian Depository Receipts (IDRs).

Type	Where listed	Underlying
ADR	A stock exchange in the USA such as the New York Stock Exchange or NASDAQ	Local company's shares
GDR	A stock exchange outside the US	Local company's shares
IDR	Stock exchanges in India	Foreign stocks as underlying shares

Note that the IDR runs the other way — foreign shares held for Indian investors.

What each side gains

The company, whose shares are traded as DRs, gets a wider investor base from the international markets. Investors in international markets get easy access to invest in shares of an overseas company. Holding DRs, gives investors the right to dividends and capital appreciation from the underlying shares, but not voting rights.

The fourth sample question tests this — DR holders do not have voting rights. They do get dividends and capital appreciation.

The steps in issuing DRs

The company has to comply with the listing requirements of the stock exchange and market regulator where they propose to get the DRs listed.

The company appoints a depository bank which will hold the stock and issue DRs against it.

If it is a sponsored issue, the stocks from existing shareholders are acquired and delivered to the local custodian of the depository bank. Else, the company issues fresh shares against which the DRs will be issued.

Each DR will represent certain number of underlying shares of the company.

Once the custodian confirms that the shares have been received by them, the depository bank in the foreign country will issue the depository receipts to the brokers to trade in the chosen stock exchange where the DRs have been listed.

Sponsored issue — existing shares. Otherwise — fresh shares.

4.4 Foreign Currency Convertible Bonds

Foreign Currency Convertible Bonds (FCCB) are issued by Indian companies and subscribed to by investors in foreign currency. They carry a fixed interest or coupon rate and are convertible into a certain number of ordinary shares at a preferred price.

The second sample question asks in what FCCBs raise capital — foreign currencies. Not dollars alone, and not rupees.

The payment of interest and repayment of principal (if required) is in foreign currency. The conversion price is usually set at a premium to the current market price of the shares.

Note the contrast with a convertible debenture, where the conversion price is usually... at a discount to the market price.

FCCBs allow companies to raise debt at lower rates abroad. It also protects the cash flows since maturity is by conversion of debt into equity. Also, the time taken to raise FCCBs may be less than what takes to raise pure debt abroad.

Three advantages — lower rates, protected cash flows, quicker.

Issuance of FCCBs is regulated by Reserve Bank of India (RBI) notifications under the Foreign Exchange Management Act (FEMA). The Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism), 1993 lays down the guidelines for such issues. The issue of FCCBs should be within the limits specified by RBI from time to time.

RBI and FEMA, not SEBI — because foreign currency is involved.

4.5 Exchange Traded Funds and Index Funds

Exchange Traded Funds (ETFs) are a type of mutual funds that are listed and traded on a stock exchange. ETFs are passive funds that generate returns in line with the index or benchmark. There are no investment strategies used to generate higher returns other than what the index does.

Index Funds are also passive funds but are not traded on stock exchanges. They are expected to offer a return in line with the market because they invest in a portfolio that mimics a market index. The portfolio of index funds consists of the same securities as that of market index in the exact weightages allotted to each security.

Both are passive; only the ETF is traded on an exchange.

Table 4.1 — the comparative summary

Parameter	Open-ended Mutual Funds	Close-ended Mutual Funds	Index based ETFs
Unit capital	Flexible	Fixed	Flexible
Net Asset Value (NAV)	Daily	Daily	Real time
Liquidity provider	Fund	Stock market	Fund and stock market
Transaction price	NAV linked price	Significant premium / discount to NAV	Very close to real time NAV
Portfolio disclosure	Monthly	Monthly	Daily
Intra-day trading	Not possible	Expensive (due to bid-ask spreads)	Possible at low costs

Six parameters, and the ETF wins on four of them — real-time NAV, both liquidity sources, daily disclosure, and cheap intra-day trading.

Exchange traded funds are most popular as index-based ETFs. However, other variants are also possible, such as, debt-oriented ETFs, Gold ETFs and Silver ETFs. Exchange Traded Funds offer a low-cost investment avenue to its investors.

4.6 Investment Trusts

An Investment Trust pools the funds of its investors/ shareholders and invests them in a diversified portfolio of securities. Investment Trusts are typically close ended funds which can be traded on a stock exchange. In Indian markets, 2 types of investment trusts are operational under the appropriate SEBI Regulations.

i. Real Estate Investment Trusts

REITs are trusts registered with SEBI that invest in commercial real estate assets.

The fifth sample question tests this — REITs invest in commercial real estate assets, not residential.

The REIT will raise funds through an initial offer and subsequently through follow-on offers, rights issue and institutional placements. The value of the assets owned or proposed to be owned by a REIT coming out with an initial offer will not be less than Rs. 500 crore and the minimum offer size will not be less than Rs.250 crore. The minimum subscription amount in an initial and follow-on offer shall be in the range of Rs. 10,000 to Rs. 15,000. The units are listed on the stock exchange.

From the SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2021, w.e.f. 30.07.2021.

And a recent reclassification: REITs are now reclassified as equity related instruments for facilitating enhanced participation by Mutual funds and Specialized Investment Funds (SIFs) — SEBI Circular No. HO/24/13/12(1)2025-IMD-POD-2/I/157/2025 dated November 28, 2025.

ii. Infrastructure Investment Trusts

InvITs are trusts registered with SEBI that invest in the infrastructure sector. The InvIT will raise funds from the public through an initial offer of units. The offer shall be for not less than Rs. 250 crores and the value of the proposed assets of the InvIT shall not be less than Rs. 500 crores. The minimum subscription amount in an initial and follow-on offer shall be in the range of Rs. 10,000 to Rs. 15,000. The units are listed on a stock exchange.

From the SEBI (Infrastructure Investment Trusts)(Amendment) Regulations, 2021, w.e.f. 30.07.2021.

Item	REIT	InvIT
Invests in	Commercial real estate assets	The infrastructure sector
Minimum asset value	Not less than Rs. 500 crore	Not less than Rs. 500 crores
Minimum offer size	Not less than Rs. 250 crore	Not less than Rs. 250 crores
Minimum subscription	Rs. 10,000 to Rs. 15,000	Rs. 10,000 to Rs. 15,000
Units	Listed on the stock exchange	Listed on a stock exchange

Identical figures on both sides — only the asset class differs.

The chapter's sample questions confirm that a warrant is a right to subscribe to the equity shares of a company; that FCCBs raise capital in foreign currencies; that the stocks underlying a DR issue are held by the depository bank or local custodian; that DR holders do not have voting rights; and that REITs invest in commercial real estate assets.

Think of it like this

A warrant is only worth using when the market price is higher

The workbook explains this with one clean example, and the logic is worth grasping rather than memorising.

A right, not an obligation — which is exactly why the price comparison matters.

Warrants will be exercised if the share price at the time of exercise is higher than the price at which the investors have the right/ option to buy the shares.

The example: assume a warrant enables an investor to buy an equity share of a company at Rs.100. The warrant will be exercised: (a) when it is due to be exercised, (b) if the price of the share in the market is more than Rs.100.

And why it will not be exercised otherwise: if the market price is less than Rs.100, the investor can always buy from the market, rather than use the option to buy the same share at a higher price.

No one pays Rs. 100 for something on sale at Rs. 90. The warrant simply lapses.

Two consequences follow. Conversion/ exercise of the warrants results in increase in share capital — new shares are created, so existing shareholders are diluted. And warrants may be used by promoters to increase their stake in the company.

Which is why they are regulated: issue of warrants is subject to SEBI guidelines and shareholders' approval. The regulations include an upfront payment and a lock-in on conversion.

An upfront payment stops a promoter taking a free bet on his own share price; a lock-in stops him selling immediately on conversion.

They can also be detached and sold: warrants may be traded on the stock exchange as a security separate from the debenture with which it was issued.

And they last longer than their cousin: warrants usually have a longer lifetime as compared to options contracts which they closely resemble.

FCD, PCD, NCD: how much of the debenture becomes equity

The three abbreviations describe one variable — the proportion converted.

Four things must be stated at issue: the date on which the conversion will be made · the ratio of conversion i.e. the number of shares that the investor will be eligible to get for each debenture · the price at which the shares will be allotted to the investor on conversion. Usually this is at a discount to the market price · and the proportion (full or part) of the debenture that will be converted into equity shares.

That last one gives the names. Accordingly, the debenture may be referred to as Fully Convertible Debenture (FCD) or Partly Convertible Debenture (PCD) or Non-Convertible Debenture (NCD).

A PCD is half debt for life — the unconverted part continues as an ordinary debenture, still paying interest and still repayable.

Why a company likes them. Convertible debentures usually have a lower coupon rate than pure debt instruments. This is because the yield to the investor in such debenture is not only from the coupon alone but also the possibility of capital appreciation in the investment once the debentures are converted into equity.

And no cash goes out at the end: the issuer does not have to repay the debt on maturity since shares are issued in lieu of repayment, thus saving cash outflow.

When a convertible debenture is converted into equity both the interest and the principal are no longer payable.

Who pays for all this. The shareholding percentage of the existing shareholders gets diluted when fresh shares are issued on conversion — which is why convertible debentures are normally issued on rights basis or with specific approval of existing shareholders.

ADR, GDR, IDR: which way is the receipt facing?

All three are the same device pointed in different directions, and the exam tests which is which.

The machinery: to issue a DR, a specific quantity underlying equity shares of a company are lodged with a custodian bank, which authorises the issue of depository receipts against the shares.

The shares sit with the custodian; the receipts trade abroad.

ADR — listed in America. DRs are called American Depository Receipts (ADRs) if they are listed on a stock exchange in the USA such as the New York Stock Exchange or NASDAQ.

GDR — listed outside America. If the DRs are listed on a stock exchange outside the US, they are called Global Depository Receipts (GDRs).

IDR — the mirror image. When DRs are issued in India and listed on stock exchanges in India with foreign stocks as underlying shares, these are called Indian Depository Receipts (IDRs).

An Indian investor buying an IDR is buying into a foreign company — the flow of ownership runs inward, not outward.

Who gains what: the company, whose shares are traded as DRs, gets a wider investor base from the international markets. Investors in international markets get easy access to invest in shares of an overseas company.

And the crucial limitation: holding DRs, gives investors the right to dividends and capital appreciation from the underlying shares, but not voting rights.

Money yes, control no — because the registered holder of the shares is the custodian, not the DR holder.

How an issue is put together. The company complies with the foreign exchange's listing requirements, appoints a depository bank which will hold the stock and issue DRs against it, and then either acquires stocks from existing shareholders in a sponsored issue or issues fresh shares. Each DR will represent certain number of underlying shares.

ETF against index fund against ordinary mutual fund

Table 4.1 is the most examinable thing in the chapter. Learn it as a grid.

Both ETFs and index funds are passive. ETFs are passive funds that generate returns in line with the index or benchmark. There are no investment strategies used to generate higher returns other than what the index does. And index Funds are also passive funds but are not traded on stock exchanges.

The one difference between them is the exchange. An index fund invest[s] in a portfolio that mimics a market index, its portfolio consisting of the same securities as that of market index in the exact weightages allotted to each security — but you buy and sell it through the fund, not on a screen.

Now the table's six rows.

Unit capital: flexible for open-ended funds and ETFs, fixed for close-ended.

NAV: daily for both mutual fund types, real time for ETFs — because they trade continuously.

Liquidity provider: the fund for open-ended, the stock market for close-ended, and fund and stock market for ETFs — both routes.

Transaction price: NAV linked price for open-ended, significant premium / discount to NAV for close-ended, and very close to real time NAV for ETFs.

That row explains why close-ended funds disappoint. With only the market to sell into, the price can drift far from the underlying value.

Portfolio disclosure: monthly for both mutual fund types, daily for ETFs.

Intra-day trading: not possible in an open-ended fund, expensive (due to bid-ask spreads) in a close-ended one, and possible at low costs in an ETF.

Variants beyond the index: debt-oriented ETFs, Gold ETFs and Silver ETFs. And the summary claim — Exchange Traded Funds offer a low-cost investment avenue to its investors.

REITs and InvITs: same numbers, different assets

The two investment trusts are built to the same template, which makes them easy to learn together.

REITs are trusts registered with SEBI that invest in commercial real estate assets.

Commercial — offices, malls, warehouses. Not homes, which is what the fifth sample question tests.

InvITs are trusts registered with SEBI that invest in the infrastructure sector.

Now the figures, which are identical for both:

The value of the assets owned or proposed to be owned by a REIT coming out with an initial offer will not be less than Rs. 500 crore and the minimum offer size will not be less than Rs.250 crore. The minimum subscription amount in an initial and follow-on offer shall be in the range of Rs. 10,000 to Rs. 15,000.

And for the InvIT: the offer shall be for not less than Rs. 250 crores and the value of the proposed assets of the InvIT shall not be less than Rs. 500 crores. The minimum subscription amount in an initial and follow-on offer shall be in the range of Rs. 10,000 to Rs. 15,000.

Rs. 500 crore of assets, Rs. 250 crore offer, Rs. 10,000–15,000 subscription — for both.

**Both from the 2021 amendment regulations, w.e.f. 30.07.2021, and in both cases the units are listed on the stock exchange.

How a REIT raises money: through an initial offer and subsequently through follow-on offers, rights issue and institutional placements.

And a recent change widens who may buy them: REITs are now reclassified as equity related instruments for facilitating enhanced participation by Mutual funds and Specialized Investment Funds (SIFs).

Key terms in this chapter

ADR, GDR and IDR: ADRs are DRs listed on a US exchange such as the New York Stock Exchange or NASDAQ; GDRs are listed on an exchange outside the US; and IDRs are issued in India and listed on Indian exchanges with foreign stocks as the underlying shares.
Advantages of convertible debentures: They carry a lower coupon than pure debt because the investor also gains from possible capital appreciation on the converted equity, and the issuer avoids repaying principal on maturity since shares are issued in lieu, saving cash outflow. On conversion both interest and principal cease to be payable.
Advantages of FCCBs: They allow companies to raise debt at lower rates abroad, protect cash flows since maturity is by conversion of debt into equity, and may take less time to raise than pure debt abroad.
Conversion terms: The issuer specifies at issue the date of conversion, the ratio of conversion — the number of shares per debenture — the price at which shares will be allotted, usually at a discount to the market price, and the proportion converted, giving a fully convertible debenture, partly convertible debenture or non-convertible debenture.
Convertible debenture: A debt instrument convertible into equity shares at a future date, paying periodic coupon interest until redemption or conversion, with the investor able to take shares instead of cash redemption.
Depository receipts: Financial instruments representing shares of a local company but listed and traded on a stock exchange outside the country, issued in foreign currency, usually US dollars. Underlying equity shares are lodged with a custodian bank which authorises the issue of receipts against them.
Exchange Traded Funds: A type of mutual fund listed and traded on a stock exchange. ETFs are passive funds generating returns in line with the index or benchmark, with no strategies to beat it. Variants include debt-oriented, gold and silver ETFs, and they offer a low-cost investment avenue.
Exercise of a warrant: A warrant is exercised only if the share price at the time of exercise is higher than the price at which the investor has the right to buy; below that price he would simply buy in the market instead.
Foreign Currency Convertible Bonds: Bonds issued by Indian companies and subscribed by investors in foreign currency, carrying a fixed coupon and convertible into a certain number of ordinary shares at a preferred price. Interest and principal are paid in foreign currency and the conversion price is usually set at a premium to the current market price.
Index funds: Passive funds not traded on stock exchanges, expected to offer a return in line with the market because they invest in a portfolio mimicking a market index — the same securities in the exact weightages allotted to each.
Infrastructure Investment Trusts: Trusts registered with SEBI investing in the infrastructure sector, raising funds from the public through an initial offer of units. The offer must be not less than Rs. 250 crore, proposed assets not less than Rs. 500 crore, and the minimum subscription in the range of Rs. 10,000 to Rs. 15,000, with units listed on a stock exchange.
Investment trust: A vehicle that pools the funds of its investors and invests them in a diversified portfolio of securities, typically close ended and tradable on a stock exchange. Two types operate in India under SEBI regulations — REITs and InvITs.
Real Estate Investment Trusts: Trusts registered with SEBI investing in commercial real estate assets, raising funds through an initial offer and later through follow-on offers, rights issues and institutional placements. Assets must be not less than Rs. 500 crore, the minimum offer size not less than Rs. 250 crore, and the minimum subscription in the range of Rs. 10,000 to Rs. 15,000, with units listed on a stock exchange. REITs are now reclassified as equity related instruments for enhanced participation by mutual funds and Specialized Investment Funds.
Regulation of FCCBs: Governed by Reserve Bank of India notifications under the Foreign Exchange Management Act, with guidelines in the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism), 1993, and within limits specified by the RBI from time to time.
Regulation of warrants: Issue of warrants is subject to SEBI guidelines and shareholders' approval, the regulations including an upfront payment and a lock-in on conversion. Promoters may use warrants to increase their stake in the company.
Rights of a DR holder: The right to dividends and capital appreciation from the underlying shares, but not voting rights.
Sponsored DR issue: An issue in which stocks are acquired from existing shareholders and delivered to the local custodian of the depository bank, as against an unsponsored route where the company issues fresh shares against which the DRs are issued.
Table 4.1 comparison: Unit capital is flexible for open-ended funds and ETFs but fixed for close-ended funds; NAV is daily for both fund types but real time for ETFs; liquidity comes from the fund, the stock market, or both respectively; transaction price is NAV linked, at a significant premium or discount to NAV, or very close to real-time NAV; portfolio disclosure is monthly, monthly and daily; and intra-day trading is impossible, expensive due to bid-ask spreads, and possible at low cost.
Warrant: An instrument giving the investor the right to buy shares of the company in the future, the number of shares and the pre-determined date and price being specified at issue. Exercise increases share capital, and warrants may be traded on the exchange separately from the debenture with which they were issued.

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Original explanatory writing based on the official NISM workbook for Series II-B, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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