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Stock Trade Settlement Process in India: Trading & Clearing Cycle

Stock Trade Settlement Process in India: As Investors, we play the role of both buyers and sellers in the stock market. We indulge in trading activities to either purchase or sell shares. Although the mechanism may look simple with only a few parties involved, there are a number of activities performed by various other groups behind the scenes.  This is to ensure trading activities take place smoothly with minimal risk.

In today’s article, we’ll look into the stock trade settlement process in India. Here, we aim at understanding the Trade cycle, Clearing, and Settlement process while trading in shares.

Trade Cycle in India

NSE India

The Stock Exchange in India follows a ‘T+2’ rolling settlement cycle. The day the trade is executed is known as the ‘Trade Date’ and is signified as ‘T’. Every working day after the trade date is signified as T+1, T+2 and so on (weekends and stock exchange holidays not included). The trades in India settle on T+2 day.

Example: Mr. Ajay buys shares of company ABC on Monday. He buys 10 shares at Rs 1,000 per share. This activity is performed on Monday. Here Monday and the date associated is known as the Trade Date. It is signified by ‘T’.

  • On the trade date ‘T’, Rs. 10,000 is deducted from Ajay’s account and the broker provides him with a Contract Note as proof of the transaction. 
  • On T+1 day, all the internal processing of the trade gets worked out. 
  • On T+2 day, Mr. Ajay will receive shares of company ABC in the DEMAT account by the end of the day.

If in the above example Mr. Ajay had sold his shares instead of buying, then the shares would get blocked in his DEMAT account before T+2 day. They would be moved out of his DEMAT Account before T+2 day. On T+2 day proceeds from the sale will be credited to his trading account after deduction.

The example we went through above is what we, from the investor perspective, would experience while trading. We will now go through the process that makes this possible.

Process involved in the Transfer of Shares

The transfer of shares includes three processes.

1. Execution

Execution is when the order to buy/sell is completed by the buyer and the seller. An execution is said to be completed only when it is filled. This is after the trader places an order and based on the instructions of the order the broker fulfills the requirements of the order in the stock market. Only then the order is said to be filled.

2. Clearance

After the trade is executed the clearing process begins. In clearing process, it is identified how much money is owed to the seller and how many shares are owed to the buyer. Apart from identification trade recording, confirmation, determination of the obligation of different parties and risk assessment also take place. This process is managed by a third party known as a Clearing House. Clearing Activities take place on T+1 day.

Also read: Different Charges on Share Trading Explained- Brokerage, STT & More

3. Settlement

The stage involves the actual exchange of shares and money. Here the shares are moved to the buyer’s DEMAT Account and the money is transferred to the sellers trading account. These activities take place on T+2 days.

Participants involved in the Process

In the trading, clearing, and settlement stages “the Stock exchanges ensure a platform for trading while Clearing Corporation ensures the funds and security-related issues of the trading members and make sure that the trade is settled through the exchange of obligations. The depositories and clearing banks provide the necessary interface between the custodians or clearing members for settlement of securities and funds obligations”.

From the above short explanation of activities that take place, we will first look at what are the roles of different parties involved and link them to understand the procedure that takes place to ensure a clearer understanding.

1. Clearing Corporation

The National Securities Clearing Corporation Limited (NSCCL) is responsible for clearing and settlement of trades executed and risk management at the stock exchange. It ensures short and consistent containment cycles. The NSCCL is also obligated to meet all the settlements regardless of member defaults.

2. Clearing Members / Custodians

The trading members of the stock exchange place deals in the Stock Exchange which is moved to the NSCCL. The NSCCL transfers these deals to the clearing members. A clearing member is responsible for determining the position of shares and funds to suit the trade. And once it is confirmed the actual settlement process takes place.

3. Clearing Banks

The settlement of funds takes place through Clearing Banks. Every clearing member is required to open a clearing account with one of the following 13 clearing banks

  • HDFC Bank
  • ICICI Bank Ltd
  • Axis Bank Ltd
  • Kotak Mahindra Bank
  • JP Morgan Chase Bank
  • State Bank of India
  • HSBC Bank
  • Stock Holding Corporation of India Ltd
  • Infrastructure Leasing and Financial Services Ltd,
  • Deutsche Bank, Standard Chartered Bank
  • Orbis Financial Corporation Ltd
  • DBS Bank
  • Citibank.

The Clearing members receive funds in case of a pay-out in the clearing account or are to make funds available in the clearing account in case of a pay-in.

4. Depositories

We may not be thoroughly familiar with the term depository but are familiar with a related term called DEMAT Account. There are 2 depositories in India NSDL and CDSL. These depositories hold the investor DEMAT (Dematerialised) Accounts. Clearing members are also required to maintain a clearing pool Account with the depositories. The required securities must be transferred to the clearing pool account by the clearing members on the settlement day.

5. Professional Clearing Members

NSCCL admits a special category of members namely professional clearing members. PCM are not allowed to trade. They can only clear and settle trades similarly like the custodians for their clients.

Clearing and Stock Trade Settlement Process

Clearing and Stock Trade Settlement Process

(Source: AdityaTrading)

  1. Trade Details are transferred from Stock Exchange to National Securities Clearing Corporation Limited (NSCCL).
  2. NSCCL notifies the details of trade to clearing members or custodians who affirm back. Based on the affirmation, it determines obligations.
  3. Download of obligation and pay-in advice of funds or securities are sent by NSCCL to clearing members or custodians.
  4. Instructions sent to clearing banks to make funds available by pay-in time.
  5. Instructions to depositories to make securities available by pay-in-time.
  6. Pay-in of securities (NSCCL directs to debit pool account of custodians or Clearing members and credit its account to depository and depository do it)
  7. Pay-in of funds (NSCCL directs to the debit account of custodians or Clearing members and credit its account to Clearing Banks and clearing bank do it)
  8. Pay-out of securities (NSCCL directs to credit pool account of custodians or Clearing members and debit its account to depository and depository do it)
  9. Pay-out of funds (NSCCL directs to credit account of custodians or Clearing members and debit its account to Clearing Banks and clearing bank do it)
  10. Depository informs custodians 
  11. Clearing Banks inform custodians or Clearing members.

Also read: 8 Best Discount Brokers in India – Stockbrokers List 2020

Closing Thoughts

The above explained stock trade settlement process in India might look complicated but they work in perfect synchronization to ensure smooth functioning of the stock market. If we are to compare how far the markets have come since the 1960s and 1970s to today, the difference will be huge. At those times, the payments were still made with paper checks. The exchanges closed on Wednesday and took 5 business days to settle trades so that the paperwork could get done.

In comparison to the stock market not even functioning throughout the week and five days for the trade cycle, we can thank technological and procedural advances for the ease of functioning we enjoy.

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