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Stock market is a trading platform which provides an opportunity to buyers and sellers of securities

to do transactions. As of now there are 23 recognised stock exchanges in India and 24th is likely to
get functional soon. However the majority of transactions in securities happen only on the National
Stock Exchange. The Bombay stock Exchange is the second largest contributor in the overall pie of
total transactions. However it's contribution is restricted to 5 to 7 percent only. There are three
types of instruments that are traded on National Stock Exchange namely equities, derivatives and
debt instruments. This article attempts to explain the procedure involved in trading and settlement
of equities.
Before understanding the procedure of trading and settlement, it is important to have an overview
of changes that have taken place in Indian securities market in last ten years. Three most noticeable
changes which have taken place are 1) Dematerialisation , 2) Introduction of screen based trading
and 3) Shortening of trading and settlement cycles. The Depositories Act was passed by the
parliament in 1995 and this paved the way for conversion of physical securities into electronic. With
establishment of National Stock Exchange, there was a significant change in the level of technology
used for the operation of stock market. It led to introduction of Screen Based Trading thereby
removing the earlier system of open outcry where prices of securities were quoted by symbols. Now
all the transactions happen on computer which is spread across country and connected to National
Stock Exchange through VSAT. These two factors combined together helped in reducing the trading
and settlement cycle in Indian securities market which got reduced from as long as 22 days to 2 days
currently.
Presently in India, stock exchanges follow T+2 days settlement cycle. Under this system, trading
happens on every business day, excluding Saturday, Sunday and exchange notified holidays. The
trading schedule is between 10:00 a.m. in the morning to 3:30 p.m. in the evening. During this
period , shares of the companies listed on a particular stock exchange can be bought and sold. The
SEBI has made it mandatory that only brokers and sub-brokers registered with it can buy and sell
shares in the stock exchange. A person desirous of buying or selling shares on the stock market
needs to get himself registered with one of these brokers / sub-brokers. There is a provision for
signing of broker/sub-broker - client agreement form. Brokers/sub brokers ask their clients to
deposit money with them known as margin based on which brokers provide exposure to the clients
in the stock market.
However signing of client-broker agreement is not sufficient. It is also essential for a person to open
a demat account through which securities are delivered and received. This demat account can be
opened with a depository participant which again is a SEBI registered intermediary. Some of the
leading depository in the country are Stock Holding Corporation of India Ltd., ICICI Bank, HDFC Bank
etc. If an individual buys shares ,it is in the demat account that credit of shares are received.
Similarly when a person sells shares, he has to transfer shares to the brokers account through his
demat account. All the brokers/sub-brokers also essentially have a demat account.
Shares can be bought and sold through a broker on telephone. Brokers identify their clients by a
unique code assigned to a client. After the transaction is done by a client broker issues him contract
note which provides details of transaction. Apart from the purchase price of security , a client is also
supposed to pay brokerage, stamp duty and securities transaction tax. In case of sale transaction,
these costs are reduced from the sale proceeds and then remaining amount is paid to the client.
Trading of securities happen on the first day while settlement of the same happens two days after.
This means that a security bought on Monday will be received by the client earliest on Wednesday
which is called pay out day by the exchange. However there is provision which allows a broker to
transfer securities till 24 hours after pay out receipt. Hence the broker may transfer shares latest by

If a person has bought security then he is suppose d to pay money to the broker before pay in deadline which is two days after trading day but the second day is considered till 10:30 a. On T+2 days all the brokers who has transacted two days before receive shares or give shares to the clearing corporation of exchange. it is not only because of inherent strength of the economy but also because stock markets have reached very advanced stage which make outsiders to understand the process in Indian market easily. Only. Clearing corporation identifies payable/ receivable position of brokers based on which obligation report for brokers are created.m.If India is able to attract huge investments in securities now. Settlement of securities is done by the clearing corporation of the exchange. Any transfer after Thursday would invite penalty for the broker.Thursday for a security bought on Monday. On T+2 day. . One of the most noticeable achievements of Indian securities market have been reduction in the settlement cycle which has brought it at par with global securities market.Hence the client must pay money to the broker before 10:30 a.m. This all is done through automated set up Depository which involves NSDL and CDSL. Settlement of funds is done by a panel of banks registered with the exchange.

a clearing member would have either pay-in or pay-out obligations for funds and securities separately. Cleared and non-cleared deals NSCCL carries out the clearing and settlement of trades executed on the exchange except Trade for trade physical segment of capital market. In the case of securities in the Trade for Trade – Surveillance segment and auction trades. every trade results into a deliverable and receivable obligation of funds and securities. Trading members can trade on a proprietary basis or trade for their clients.e. The custodian is required to confirm settlement of these trades on T + 1 day by the cut-off time 1. .Equities NSCCL carries out clearing and settlement functions as per the settlement cycles provided in the settlement schedule. Accordingly. Nonconfirmation by custodian devolves the trade obligation on the member who had input the trade for the respective client. A multilateral netting procedure is adopted to determine the net settlement obligations (delivery/receipt positions) of the clearing members. Primary responsibility of settling these deals rests directly with the members and the Exchange only monitors the settlement. Clearing members desirous of availing this facility shall send a letter in the format provided in the Annexure. after which the obligations are discharged by settlement.00 p. Members pay-in and pay-out obligations for funds and securities are determined by 2. bad delivery. auction settlement etc.com http://www.m.nseindia. NSCCL has also devised mechanism to handle various exceptional situations like security shortages. on T + 1 day and are downloaded to them so that they can settle their obligations on the settlement day (T+2).30 p. All proprietary trades become the member’s obligation for settlement. These instructions will be released on the T+1 day to NSDL / CDSL and the securities in the Clearing Members’ pool accounts will be marked for pay-in.htm Clearing & Settlement . Where trading members trade on behalf of their clients they could trade for normal clients or for clients who would be settling through their custodians. For pay-in through NSDL / CDSL a facility has been provided to members wherein delivery-out instructions will be generated automatically by the Clearing Corporation based on the net delivery obligations of its Clearing Members. Settlement is a two way process which involves transfer of funds and securities on the settlement date. The parties are required to report settlement of these deals to the Exchange. Trades which are for settlement by Custodians are indicated with a Custodian Participant (CP) code and the same is subject to confirmation by the respective Custodian. obligations are determined on a gross basis i. The clearing function of the clearing corporation is designed to work out a) what members are due to deliver and b) what members are due to receive on the settlement date. NSCCL has two categories of clearing members: trading clearing members and custodians.com/products/content/equities/equities/clearing_settlement. company objections. Clearing is the process of determination of obligations.nseindia.m.

NSCCL conducts a buy –in auction on the T+2 day itself and the settlement for the same is completed on the T+3 day.e.e.e. All trades concluded during a particular trading date are settled on a designated settlement day i. which include bank holidays. T+2 day. For arriving at the settlement day all intervening holidays.i.com http://www. Trades under settlement type Z are settled directly between the members and may be settled either in physical or dematerialized mode. A tabular representation of the settlement cycle for rolling settlement is given below: Activity Day Trading Rolling Settlement Trading T Clearing Custodial Confirmation T+1 working days Delivery Generation T+1 working days Securities and Funds pay in T+2 working days Securities and Funds pay out T+2 working days Valuation Debit T+2 working days Auction T+2 working days Settlement Post Settlement . which include bank holidays. Saturdays and Sundays are excluded. NSE holidays. Trades under settlement type O are settled in physical form. In case of short deliveries on the T+2 day in the normal segment. whereas in case of W segment there is a direct close out. W. NSCCL determines the cumulative obligations of each member on the T+1 day and electronically transfers the data to Clearing Members (CMs). The settlement schedule for all the settlement types in the manner explained above is communicated to the market participants vide circular issued during the previous month. D and A are settled in dematerialized mode. NSE holidays.nseindia. on the 2nd working day. for all trades executed on trading day . For arriving at the settlement day all intervening holidays. Saturdays and Sundays are excluded. Details of the two modes of settlement are as under: Dematerialised settlement NSCCL follows a T+2 rolling settlement cycle.T day the obligations are determined on the T+1 day and settlement on T+2 basis i.nseindia.com/products/content/equities/equities/settlement_cycle.htm Settlement Cycle The important settlement types are as follows: Normal segment (N) Trade for trade Surveillance (W) Retail Debt Market (D) Limited Physical market (O) Non cleared TT deals (Z) Auction normal (A) Trades in the settlement type N. Rolling Settlement In a rolling settlement. For all trades executed on the T day.

The buyer must compulsorily send the securities for transfer and dematerialisation. The settlement cycle for this segment is same as for the rolling settlement viz: Activity Day Trading Rolling Settlement Trading T Clearing Custodial Confirmation T+1 working days Delivery Generation T+1 working days Securities and Funds pay in T+2 working days Securities and Funds pay out T+2 working days Assigning of shortages for close out T+2 working days Reporting and pick-up of bad delivery T+4 working days Settlement Post Settlement . However securities would be accepted as valid company objection. Any delivery in excess of 500 shares is marked as short and such deliveries are compulsorily closed-out. Any delivery of shares which bears the last transfer date on or after the introduction of the security for trading in the LP market is construed as bad delivery. Non rectification/replacement for objection cases are closed out at at 20% above the official closing price in regular Market on the auction day. are compulsorily closed-out at 20% over the actual traded price. Non rectification/replacement for bad delivery are closed out at at 10% over the actual trade price. Salient features of Limited Physical Market Delivery of shares in street name and market delivery (clients holding physical shares purchased from the secondary market) is treated as bad delivery. The selling/delivering member must necessarily be the introducing member. Shortages. Limited Physical Market Settlement for trades is done on a trade-for-trade basis and delivery obligations arise out of each trade. latest within 3 months from the date of pay-out. if any. only if the securities are lodged for transfer within 3 months from the date of payout. The shares standing in the name of individuals/HUF only would constitute good delivery.Auction settlement T+3 working days Bad Delivery Reporting T+4 working days Rectified bad delivery pay-in and pay-out T+6 working days Re-bad delivery reporting and pickup T+8 working days Close out of re-bad delivery and funds pay-in & pay-out T+9 working days Physical settlement Limited physical Market : To provide an exit route for small investors holding physical shares in securities the Exchange has provided a facility for such trading in physical shares not exceeding 500 shares in the 'Limited Physical Market' (small window). Company objections arising out of such trading and settlement in this market are reported in the same manner as is currently being done for normal market segment.

All objections.100 or 109 of SEBI Good/Bad delivery guidelines). NSCCL conducts a buying-in auction for the non-rectified part of defective document on the next auction day through the trading system of NSE.e. within 7 days of lodgement against him. . which are not bought-in. This amount is credited to the receiving member's account on the auction pay-out day. The delivering member is required to rectify these within two days. are deemed closed out on the auction day at the closing price on the auction day plus 20%. not as required under guideline No. Unrectified bad deliveries are assigned to auction on the next day Company Objections (in case of physical settlement The CM on whom company objection is lodged has an opportunity to withdraw the objection if the objection is not valid or the documents are incomplete (i.Close out of shortages T+4 working days Replacement of bad delivery T+6 working days Reporting of re-bad and pick-up T+8 working days Close out of re-bad delivery T+9 working days Bad Deliveries (in case of physical settlement) Bad deliveries (deliveries which are prima facie defective) are required to be reported to the clearing house within two days from the receipt of documents. If the CM is unable to rectify/replace defective documents on or before 21 days.

Option to settle Daily MTM on T+0 day Clearing members may opt to pay daily mark to market settlement on a T+0 basis. NSCCL marks all positions of a CM to the final settlement price and the resulting profit / loss is settled in cash. The option can be exercised once in a quarter (Jan-March. as the case may be.nseindia. Clearing members who wish to opt to pay daily mark to market settlement on T+0 basis shall intimate the Clearing Corporation as per the format specified in specified format.com http://www. The pay-in and pay-out of the mark-to-market settlement is on T+1 days (T = Trade day). The profits/ losses are computed as the difference between the trade price or the previous day's settlement price.nseindia. (. is currently the price computed as per the formula detailed below: F = S * e rt where : F = theoretical futures price S = value of the underlying index r = rate of interest (MIBOR) t = time to expiration Rate of interest may be the relevant MIBOR rate or such other rate as may be specified. all the open positions are reset to the daily settlement price. The option once exercised shall remain irrevocable during that quarter. Theoretical daily settlement price for unexpired futures contracts. After daily settlement. The pay-out of MTM settlement shall continue to be done on T+1 day basis. Jul-Sep & Oct-Dec).Collapse All Daily Mark-to-Market Settlement The positions in the futures contracts for each member is marked-to-market to the daily settlement price of the futures contracts at the end of each trade day. which are not traded during the last half an hour on a day. Download file for market settlement.doc) Final Settlement On the expiry of the futures contracts. The mark to market losses or profits are directly debited or credited to the CMs clearing bank account.htm Settlement Mechanism Settlement of futures contracts on index and individual securities + Expand All | . and the current day's settlement price. The CMs who have suffered a loss are required to pay the mark-to-market loss amount to NSCCL which is passed on to the members who have made a profit. Apr-June. Clearing members who opt for payment of daily MTM settlement amount on a T+0 basis shall not be levied the scaled up margins. . CMs are responsible to collect and settle the daily mark to market profits / losses incurred by the TMs and their clients clearing and settling through them. This is known as daily mark-to-market settlement.com/products/content/derivatives/equities/settlement_mechanism.

as the case may be. The premium payable amount and premium receivable amount are directly debited or credited to the CMs clearing bank account. Final Exercise is Automatic on expiry of the option contracts. and the final settlement price of the relevant futures contract. The final settlement profit / loss is computed as the difference between trade price or the previous day's settlement price. Long positions at in-the money strike prices are automatically assigned to short positions in option contracts with the same series. A penalty of 0. Final settlement loss/ profit amount is debited/ credited to the relevant CMs clearing bank account on T+1 day (T= expiry day).Collapse All Daily Premium Settlement Premium settlement is cash settled and settlement style is premium style. Further. These would be construed as non compliance and penalties applicable for fund shortages from time to time would be levied.07 % of the margin amount at end of day on T+0 would be levied on the clearing members. + Expand All | . CMs are responsible to collect and settle for the premium amounts from the TMs and their clients clearing and settling through them. exercise style is European style. This is known as daily premium settlement. the benefit of scaled down margins shall not be available in case of non payment of daily MTM settlement on a T+0 basis from the day of such default to the end of the relevant quarter.The final settlement of the futures contracts is similar to the daily settlement process except for the method of computation of final settlement price. The pay-in and pay-out of the premium settlement is on T+1 day (T = Trade day). Failure to do so would tantamount to non payment of daily MTM settlement on a T+0 basis. The premium payable position and premium receivable positions are netted across all option contracts for each CM at the client level to determine the net premium payable or receivable amount. Open positions in futures contracts cease to exist after their expiration day Settlement Procedure Daily MTM settlement on T+0 day Clearing members who opt to pay the Daily MTM settlement on a T+0 basis would compute such settlement amounts on a daily basis and make the amount of funds available in their clearing account before the end of day on T+0 day. on the expiration day of an option contract. The CMs who have a premium payable position are required to pay the premium amount to NSCCL which is in turn passed on to the members who have a premium receivable position. on a random basis. For index options contracts and options contracts on individual securities. at the end of each day. . partial payment of daily MTM settlement would also be considered as non payment of daily MTM settlement on a T+0 basis. which have been exercised. Option contracts. Final Exercise Settlement Final Exercise settlement is effected for option positions at in-the-money strike prices existing at the close of trading hours. shall be assigned and allocated to Clearing Members at the client level. Further.Collapse All Settlement of options contracts on index and individual securities + Expand All | .

in F&O Segment. cease to exist after their expiration day.Collapse All . in option contracts.Exercise settlement is cash settled by debiting/ crediting of the clearing accounts of the relevant Clearing Members with the respective Clearing Bank. Open positions. The pay-in / pay-out of funds for a CM on a day is the net amount across settlements and all TMs/ clients. + Expand All | . Final settlement loss/ profit amount for option contracts on Individual Securities is debited/ credited to the relevant CMs clearing bank account on T+1 day (T = expiry day). Final settlement loss/ profit amount for option contracts on Index is debited/ credited to the relevant CMs clearing bank account on T+1 day (T = expiry day).