Settlement Process in Indian Stock Market Trading| Espresso

Indian Stock Market Trading and Its Settlement Process

As an investor, you might think that buying or selling stocks in the Indian stock trading market completes the transaction. However, the back-end process is huge and what goes behind the scenes to make the trading smooth and successful is something that only a few are aware of. For instance, the stock trade in India is just the surface of the entire secondary market transaction. And the back-end processes include the clearing and the settlement process as well.

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In the case of secondary Indian stock market trading, one needs to open a Demat account first. And once the account has become active, you will be able to buy and sell securities. Also, after your order has been completed, you will receive a contract note which means that the trade has been settled. The settlement processes in the secondary market commence with selecting a stockbroker and end when the shares are settled.

What is the Trade Settlement Process in Stock Trade in India?

The settlement process in trade is a two-way process. This comes during the last phase of the trading transaction. The process is simple; the buyer gets the stocks, the seller receives the money for the stocks, and the settlement of the trade is done.

The deal officially takes place on the date of the transaction, and the date of settlement refers to the day when the transfer of the final ownership of the securities takes place. The date of the transaction is represented by the letter ‘T’, and it remains constant. The ultimate settlement process doesn’t take place on the day of the transaction. Hence, the day of settlement is termed as T+2.

Previously, when the stock exchange sold the securities in physical form, it took almost 5 days to settle a trade post a transaction. Investors had to make payments through cheques once they received the securities that came in the form of certificates delivered to them by post. This delay caused price differences and posed higher risks, thereby incurring a higher cost.

So, to control the transaction delay, stock market regulators finalised a date within which the trading transaction needed to be finished. Due to lengthy paperwork, the settlement date earlier used to be T+5. Now, it has been lessened to T+2 post digitalisation of the processes.
Also Read: Open Paperless Demat Account

Two Types of Settlement Processes in the Indian Stock Market Trading

There are two kinds of settlement processes in the stock trade in India:

  1. Spot Settlement: This is the step in which the settlement process is carried out immediately through the rolling settlement principle of T+2.
  2. Forward Settlement: This takes place when the investor is ready for trade settlement at any later date, which could be T+5 or T+7.
    Also Read: Stock Market Trading & Settlement Process

What is Rolling Settlement?

The rolling settlement is a process where the settlement happens in the consecutive days of the trade. During this process, the trading is settled in T+2 days. Hence, the deals are settled on the very next day of the transaction. However, it excludes the bank holidays, Saturdays and Sundays, and exchange holidays.

For instance, if a stock trade in India takes place on a Tuesday, the settlement happens by Thursday. Similarly, if you buy stocks on a Thursday, the total value of the investment will be deducted from your account the same day by the stockbroker; however, you will get the shares on Monday. The day of settlement is when you finally become a shareholder of the stocks you have bought.

Rules for Rolling Settlement

There are a few rules for the rolling settlement process as prescribed by the BSE and the NSE. Let us have a look:

Settlement Process Cycle in BSE (Bombay Stock Exchange)

Activities

Total Working Days

Securities Trading along with the daily statement downloads with details of transactions and margins. Final obligation downloads.

T

Pay-in and Pay-out of securities

T+1

Final obligation for Return Legs

T+2

Pay-in and Pay-out of securities, Buy-in auction for the failure of returning securities

T+2

Pay-in and Pay-out of securities for auction settlement

T+3

 

Settlement Process Cycle in NSE (National Stock Exchange)

Activities

Total Working Days

Rolling Settlement

T

Clearing, Including Custodial Confirmation and Delivery Generation

T+1

Settlement Order Through Securities and Funds Pay-In and Pay-Out

T+2

Post Settlement Auction Process

T+2

Auction Settlement Process

T+3

Reporting For Bad Deliveries

T+4

Pay-In-Pay-Out of Rectified Bad Deliveries

T+6

Re-Reporting of Bad Deliveries

T+8

Closing Of Re-Bad Deliveries

T+9

 

Conclusion

The stock trade in India follows different processes to trade stocks successfully regularly. But, all the processes mentioned above are followed for trading to happen smoothly. So, for you, as an investor, to make informed trading decisions, it is essential to know about these.

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Frequently Asked Questions

It is a market that issues new securities on a stock exchange facilitated by underwriting groups and often consists of investment banks.

A bad delivery is when the share transfer does not finish because it does not comply with the standards of the stock exchange.

A trade occurs online or offline in a stock exchange when the order placed by one party finds a counterparty. There are millions of trades happening every day on the Indian stock trading market.

 

Pay-in is the day when the stock buyer forwards the funds, and the stock seller forwards the securities to the exchange. Pay-out is when the exchange gives the money to the seller and the shares/stocks bought to the buyer.

It is a market where investors buy securities or assets from other investors rather than directly opting for issuing companies.