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For every trade on the secondary market or stock exchange, there are two parties in a transaction. The buyer buys the securities and the seller sells the securities. This transaction is a simple trade on the stock exchange. After this transaction, the trade undergoes clearing as well as settlement. For a smooth clearing process, the clearing houses match the shares owed to the buyers and sellers. In the end, the number of shares bought and sold and the final amount owed is calculated. After clearing, the settlement of transactions takes place through banks, clearing members, and depository institutions.

What is Trade Settlement?

The final step of the transaction is a two-way process which is trade settlement. Moreover, the trade is considered settled if the buyer receives the securities and the seller receives payment for such securities. While the official transaction occurs on the transaction day, the final ownership transfer takes place on the settlement date.

Moreover, the transaction date never changes. The letter ‘T’ represents the transaction date. The settlement date is ‘T’ plus the number of days it takes for a settlement to take place. 

What is the Settlement Date?

The settlement date is the day on which the ownership of the security is finally transferred. Usually, the settlement date is T+2. This means the settlement date is the transaction date plus 2 additional days for clearing and settlement processes. 

Earlier, when the security was held in physical form, the settlement date was T+5 days. After receiving the securities the investors would pay through cheques. The securities were in the form of certificates and were sent by mail. Furthermore, the delay increases costs and creates risks and results in pricing differences.

What is a Settlement Cycle?

A settlement cycle is a period within which trade must complete the settlement process according to the contract. For equity the settlement cycle is T+2. While the settlement cycle for derivatives is T+1. Moreover, it is applicable for all the trades with mark-to-market at the closing price of the contract and mark-to-market requirement. This cycle does not include Saturdays, Sundays, public holidays, NSE holidays, and BSE holidays.

Types of Stock Market Settlements

The following are the types of stock market settlements in India:

  1. Spot Settlement or Rolling Settlements- This is the most common type of settlement method. The transaction is settled immediately in the following 2 days through a rolling settlement process. 
  2. Forward Trade Settlement- This applies when the trade participants agree to take the delivery at a future date. This future date could be T+5 or T+7 days.

What is Rolling Settlement?

In a rolling settlement, the trade settlement takes several days. With this type of settlement, trades settlement occurs after the second working day. In this way, settlement is in T+2 days. This period does not include Sundays, Saturdays, bank holidays, or exchange holidays. Therefore, if a trader enters into a trade on Wednesday then the exchange closes the trade on a Friday. Similarly, if you buy shares on Friday, you must pay the broker on that day. However, the exchange credits the shares to your Demat account on the following Tuesday. On the day your trades are settled, you will become the shareholder of record.

Participants Involved in Trade Settlement

The following are the participants of the trade settlement process in India:

Clearing Corporation

One of the key players in the clearing and settlement process in the stock market is the clearing corporation. The National Securities Clearing Corporation Limited is in charge of clearing and settling trades made at the stock exchange (NSCCL). In addition, it is responsible for risk management and covers all settlement costs even if a member defaults.

Clearing Member

They contribute to the clearing and settlement procedure on the Indian stock exchange. The transactions made by trading members are transferred from the stock exchange to NSCCL, which then transfers them to the clearing members. The clearing member is responsible for choosing the share position that best suits the trade.

Clearing Banks

Settlement of funds is the responsibility of clearing banks. Each clearing member must create a clearing account with one of the 13 clearing banks. Clearing members get funds in the clearing account in the event of a pay-out, and they must make funds available in the event of a pay-in.

Professional Clearing Members

These individuals or professionals are members of the NSCCL’s special category. However, they can only clear and settle trades for their clients because they cannot trade themselves. In general, professional clearing members include banks, custodians, and other entities.

Trade Settlement Process

The following is the trade settlement process:

  • On the T day after the execution of a trade, the stock exchange sends the clearing corporation the specifics of every transaction.
  • Before closing the trade, the clearing corporation gets confirmation from the clearing members. They establish the clearing member’s obligations after receiving confirmation.
  • On verification of the specifics, the clearing institutions must have enough funds, and the depositories must release the shares.
  • For buy and sale transactions, respectively, clearing corporations receive funds and securities from clearing banks and depositories.
  • The clearing member receives securities in the case of a purchase transaction, and funds in the clearing account in the case of a sale transaction.

Bombay Stock Exchange (BSE) Trade Settlement

All transactions must be settled on a T+2 basis for all categories of securities in the equity sector and all fixed income instruments listed on the BSE.  The stock exchange lists the dates of the various settlement activities on the settlement calendar. BSE creates these dates in advance and sent to market participants by BSE. In the case of Rolling Settlements, BSE completes the pay-in and pay-out of both funds and securities on the same day.

National Stock Exchange (NSE) Trade Settlement

Custodial ConfirmationT+1 working days
Delivery GenerationT+1 working days
Securities and Funds pay inT+2 working days
Securities and Funds pay outT+2 working days
Valuation DebitT+2 working days
AuctionT+2 working days
Auction settlementT+3 working days
Bad Delivery ReportingT+4 working days
Rectified bad delivery pay-in and pay-outT+6 working days
Re-bad delivery reporting and pickupT+8 working days

Settlement Violations

When a trade is completed but there is not enough settled money in the investor’s account, a settlement violation arises. If an investor fails to provide the necessary amounts by the settlement date, the brokerage business settles the contract. In order to compensate the investor for losses due to a security value loss, the brokerage house may liquidate the investor’s assets. The brokerage may also add a certain interest rate or fee as a penalty.

Frequently Asked Questions

Can I sell my stock before the date of settlement?

Yes, you can sell the shares or stocks before the date of settlement.

What is bad delivery?

A bad delivery arises when share transfer remains incomplete because of non-compliance with guidelines. The compliance and bad delivery requirements are different for physical settlement. Within two days of receiving the documents, bad deliveries (deliveries that are clearly defective) must be reported to the clearing house. Within two days, the delivery member must make these corrections. The defective bad deliveries are set up for auction the next day.

Can I buy shares on BSE and sell on NSE?

No, a trader cannot buy shares on one stock exchange and sell over another stock exchange.

What do ‘pay-in’ and ‘pay-out’ mean?

The day of “pay-in” is when both the buyer sends their funds to the stock exchange and the seller sends their stocks to the stock exchange. The day of pay-out is when the stock exchange gives funds to the seller and the buyer’s purchased shares.

What is an auction in the settlement?

If the seller is unable to deliver the shares during trade settlement then the stock exchange starts an auction to buy the number of the shares in the auction market.

What is trade to trade settlement?

Under the trade to trade settlement segment, the shares are available for delivery only. This means that shares of Trade to Trade cannot be traded throughout the day. Each share bought or sold that belongs to this section must be delivered by paying the whole price. There is no intraday netting-off or square-off facility available.