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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
Thursday for a security bought on Monday. Any transfer after Thursday would invite penalty for the
broker. 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.m.
Only.Hence the client must pay money to the broker before 10:30 a.m. On T+2 day.
Settlement of securities is done by the clearing corporation of the exchange. Settlement of funds is
done by a panel of banks registered with the exchange. Clearing corporation identifies payable/
receivable position of brokers based on which obligation report for brokers are created. On T+2 days
all the brokers who has transacted two days before receive shares or give shares to the clearing
corporation of exchange. This all is done through automated set up Depository which involves NSDL
and CDSL.
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.If India is able to attract
huge investments in securities now, 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.
nseindia.com
http://www.nseindia.com/products/content/equities/equities/clearing_settlement.htm
nseindia.com
http://www.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, W, D and A are settled in dematerialized mode. Trades under settlement type O
are settled in physical form. Trades under settlement type Z are settled directly between the members and may be
settled either in physical or dematerialized mode.
Details of the two modes of settlement are as under:
Dematerialised settlement
NSCCL follows a T+2 rolling settlement cycle. For all trades executed on the T day, NSCCL determines the
cumulative obligations of each member on the T+1 day and electronically transfers the data to Clearing Members
(CMs). All trades concluded during a particular trading date are settled on a designated settlement day i.e. T+2
day. In case of short deliveries on the T+2 day in the normal segment, 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, whereas in case of W segment there
is a direct close out. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE
holidays, Saturdays and Sundays are excluded. 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.
Rolling Settlement
In a rolling settlement, for all trades executed on trading day .i.e.T day the obligations are determined on the T+1
day and settlement on T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening
holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. A tabular
representation of the settlement cycle for rolling settlement is given below:
Activity
Day
Trading
Clearing
Custodial Confirmation
Delivery Generation
Valuation Debit
Auction
Settlement
Post Settlement
Auction settlement
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).
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 shares standing in the name of individuals/HUF only
would constitute good delivery. The selling/delivering member must necessarily be the introducing member.
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.
Any delivery in excess of 500 shares is marked as short and such deliveries are compulsorily closed-out.
Shortages, if any, 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. Non
rectification/replacement for objection cases are closed out at at 20% above the official closing price in
regular Market on the auction day.
The buyer must compulsorily send the securities for transfer and dematerialisation, latest within 3 months
from the date of pay-out.
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. However securities would be accepted as
valid company objection, only if the securities are lodged for transfer within 3 months from the date of payout.
Day
Trading
Clearing
Custodial Confirmation
Delivery Generation
Settlement
Post Settlement
nseindia.com
http://www.nseindia.com/products/content/derivatives/equities/settlement_mechanism.htm
Settlement Mechanism
Settlement of futures contracts on index and individual securities
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Final Settlement
On the expiry of the futures contracts, NSCCL marks all positions of a CM to the final settlement price and the
resulting profit / loss is settled in cash.
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 final settlement profit / loss is computed as the difference between trade
price or the previous day's settlement price, as the case may be, and the final settlement price of the relevant
futures contract.
Final settlement loss/ profit amount is debited/ credited to the relevant CMs clearing bank account on T+1 day (T=
expiry day).
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. Failure to do so would tantamount to non payment of daily MTM settlement on a T+0 basis. Further,
partial payment of daily MTM settlement would also be considered as non payment of daily MTM settlement on a
T+0 basis. These would be construed as non compliance and penalties applicable for fund shortages from time to
time would be levied.
A penalty of 0.07 % of the margin amount at end of day on T+0 would be levied on the clearing members. Further,
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.
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Settlement of options contracts on index and individual securities
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Exercise settlement is cash settled by debiting/ crediting of the clearing accounts of the relevant Clearing
Members with the respective Clearing Bank.
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).
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).
Open positions, in option contracts, cease to exist after their expiration day.
The pay-in / pay-out of funds for a CM on a day is the net amount across settlements and all TMs/ clients, in F&O
Segment.
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