The stock market functions the way that, an investor buys the shares and on another hand, the trader sells the shares. So, this way there is always a buyer and a seller present in the stock market. The trade is settled only when a buyer receives shares and the trader receives money in replacement of one another.
Now let us discuss the process one by one.
The Secondary Market Transaction Is Divided Into Three Phases:
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Trading
Have you wondered, how easily the stock market buying and selling occurs? An enormous amount of trading occurs simultaneously. Stock Exchange plays a very vital role, digitally mismatching ‘buy’ and ‘sell’ orders from various traders. This is how each trade is executed.
Let us take for an example,
If stock Y is trading in the stock market. The buy or sell order of the stock matches the right amount and then trading is executed further.
The costliest buy amount is matched with the cheapest sell amount available, also whenever the buy amount is less than or equal to the best available sell amount a match proceeds. This further depends on the quantities of the respective types available in the stock market which is in either buy or sell market also known as market depth.
If in case the quantity on the seller side at the same price as the buy-side is not matched the order will not be fully traded. This is a very particular procedure and the availability of enough quantity is really important.
The market dept works with the support of brokerages, they figure out and collect different investors and pass them on to the stock exchanges. The exchanges are likely to be the two most known ones: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). While in the process, the intermediate between the investors and the stock exchange is the brokerages.
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Clearing
The clearing process takes place when the two orders match and a trade is executed. The clearing is the process of identification of information of security owned to the buyer and the amount of money owed to the seller. This entire process is managed and controlled by “clearing houses”. These are also independent entities.
In real market cases, traders tend to conduct more transactions. This results in the clearinghouses identifying all the transactions and the net amount or net securities owed by the traders are calculated.
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Settlement
Further steps involve, fulfilling the financial obligations identified during the clearing procedure. This involves the settlement of the transaction between the buyers and the sellers.
This is settled, once the buyer receives the security and the seller receives the amount/money.
Types of settlement in the Indian Stock Market
In an equity investment, the settlement is divided into two types.
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Spot Settlement
The spot settlement, as by the name is carried out immediately. The process starts with the rolling settlement principle of T+2.
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Forward Settlement
This settlement occurs when you agreed to make it in later days the principle followed here is: T+5 or T+7.
Introduction to Rolling settlement
If the trade is settled in days followed by the trade, it is called a rolling settlement. Here the trades are settled in T+2 days with this kind of settlement. This indicates that the deals are closed soon after the second working day. The off days to these settlements are Sundays, Saturdays, Bank holidays, and some exchange holidays. Like suppose, if the trade is done on Tuesday, then it will be closed on Thursday. Also if you buy a stock on Friday, you pay the broker the charges the very day. Though the shares will be deposited in your account this coming Tuesday. The investor becomes the shareholder of the record, on the day that your trades are settled.
The equity-settlement day is important for the dividend-seeking investors. So if the buyer is willing to collect a dividend from the company. The buyer must settle the trade for a profit before the record date.
Rolling Settlement Rules in BSE
- The shares are settled in T+2 days in the Bombay Stock Exchange(BSE).
- Government securities and fixed income securities for all the retail investors are closed in T+2 days.
- When you buy or sell the security in pay-in and pay-out, the execution is done on the same day.
- Once the BSE completes the pay-out of the funds and securities, it gets deposited by the clients within one working day.
Settlement cycle on the NSE
The cycle for rolling statement on the National Stock Exchange is given as follows:
| Rolling Settlement trading | T |
| Clearing + custodial confirmation & delivery generation | T+1 |
| Settlement through securities & Pay-in and Pay-out | T+2 |
| Post Settlement Auction | T+2 |
| Auction Settlement | T+3 |
| Report for bad deliveries | T+4 |
| Pay-in Pay-out for rectified bad delivery | T+6 |
| Re-reporting of bad deliveries | T+8 |
| Closing of Re-bad deliveries | T+9 |
Participants Involved In The Process
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Clearing corporation
This corporation plays one of the important roles in the clearing and settlement process in the stock market. The National Securities Clearing Corporation Limited (NSCCL) hold responsible for clearing and settlement of trade executed at the stock exchange. It is also in charge of risk management and is obliged for meeting all settlements regardless of the member defaults.
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Clearing Members/Custodians
They are termed as another participant in the settlement procedure in the Indian Stock Market. When any trading member places some deal in the stock exchange, this is moved to NSCCL, which transfers them to clearing members. The clearing member holds the charge of determining the position of the share to suit the trade.
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Clearing Banks
The clearing banks are solely responsible for the settlement of funds. Each clearing member needs to open an account with either of the 13 clearing banks available. In Pay-out the clearing members receive funds in the account while in Pay-In they need to make availability of funds.
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Depositories
National Securities Depository Limited(NSDL) and Central Depository Services Limited(CDSL) are the two depositories of India. They hold your Demat account and the clearing member also needs to maintain a clearing pool account with them.
On the date of settlement, the clearing member needs to transfer the securities to the clearing pool account they hold with the depositories.
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Professional Clearing Member
It is a special category appointed by the NSCCL. They are client based and are not allowed to trade only they can settle the trade for their clients. This includes clearing banks, custodians, and so on.
How Trades Are Cleared And Settled In The Stock Market?
- When the trade is executed, the stock exchange transfers the details of all the trade to the clearing corporation.
- Before closing the trade, the clearing corporation confirms the clearing members. After the confirmation is done, they determine the obligations.
- After the confirmations are made, the clearing bank must have enough funds and the depositories should make the share available.
- Now the clearing corporation gets the funds and securities from clearing banks and depositories for purchase and sale transactions.
Some Frequently Asked Questions
Can one sell share before the settlement?
You can sell the shares that are purchased before the settlement, the daytraders usually do this.
What is the example of a rolling settlement?
if an organization settles all trades taking place between the 1st and 15th of the month or on the 16th of the month, then all investors having placed their trades in this duration settles on the same day.
What is an Auction penalty?
Let us suppose you sold some X amount of shares, and fail to deliver them, Exchange will conduct an auction and buy these shares in the auction market deliver them in T+3 days
What comes first clearing or settlement?
Clearing comes first before settlement, once the clearing member purchases a transaction, then it needs to ensure that funds are made available in the account.
