Stock Market and Settlement Process in India

Trading and settlement in a secondary market starts with the selection and acceptance of a broker or Sub-broker, and ends with settlement. To trade in secondary markets, you must first open a DEMAT account with a bank or broking house. After your account has been activated, you are able to buy and sell securities. When your order has been executed and you receive a contract note, your trade is completed.

What's trade settlement?

Trade settlement is a bilateral process that occurs at the end of a transaction. The trade is considered to have been settled when the seller receives the payment and the buyer has received the securities. The transaction date is the date that the official deal takes place. However, the settlement date is the date when final ownership is transferred. The letter T denotes the transaction date, which is not subject to change. The final settlement may not occur on the same date. T+2 is the general settlement day.

In the past, securities were kept in physical form. It took five days to settle trades after actual transactions. After receiving certificates or securities, investors made cheque payments. This caused price differences, created risks, and was costly. Market regulators set a deadline within which transactions had to be completed in order to control delay. The settlement date was T+5 in the past due to paperwork. This has been reduced to T+2 after computerisation.

Types of Settlements in Stock Market:

The stock market trade settlements can be broadly divided into two categories:

1. Spot settlement – This is where the settlement takes place immediately after the rolling settlement principle of T+2.

2. Forward settlement - When you agree to settle your trade at a future date, which could be T+5 and T+7.

What's rolling settlement?

A rolling settlement is one where the settlement is done in each day of the trade. Trades in a rolling settlement are settled within T+2 days. This means that deals are settled by noon on the next working day. This does not include Saturday or Sunday, bank holidays, and exchange holidays. If a trade is made on Wednesday, it will be settled on Friday. The same applies to buying stock on Friday. However, the broker will immediately take the investment cost from your account and you receive the shares on Tuesday. You also become the shareholder of record on the settlement day.

Investors who want to receive dividends must settle the trade before the settlement date. The buyer must close the trade by the record date to ensure a payout.

BSE Rolling Settlement Rules:

1. Securities in the equity section of the Bombay Stock Exchange's (BSE) are settled within T+2 days.

2. T+2 days are used to settle government securities and fixed income securities for retail investor.

3. Both the pay-in and out of securities and monies must be done on the same day.

4. After the BSE has paid out the funds and securities, the client must deliver securities to the BSE and pay the client within one day.

Settlement Cycle on the NSE:

Below is the cycle for rolling settlements at the National Stock Exchange (NSE).

What are pay-in/pay-out?

Pay-in refers to the day that the buyer sends funds to the stock exchange and the seller sends securities. The day that the stock exchange transfers the funds to the seller and the shares are purchased to the buyer is called pay-out.

What's a bad delivery?

Bad delivery occurs when shares are not transferred due to a lack of compliance with exchange norms.

Conclusion

The stock exchange trades a lot of volume regularly. These processes must be followed in order to ensure that every trade runs smoothly. These processes are essential for investors to be able to make informed trading decisions.