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

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

Clearing & Settlement - Equities

NSCCL carries out clearing and settlement functions as per the settlement cycles provided in the settlement
schedule.
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. Settlement is a two way process which involves
transfer of funds and securities on the settlement date.
NSCCL has also devised mechanism to handle various exceptional situations like security shortages, bad
delivery, company objections, auction settlement etc.
Clearing is the process of determination of obligations, after which the obligations are discharged by settlement.
NSCCL has two categories of clearing members: trading clearing members and custodians. Trading members can
trade on a proprietary basis or trade for their clients. All proprietary trades become the members obligation for
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. 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. The
custodian is required to confirm settlement of these trades on T + 1 day by the cut-off time 1.00 p.m. 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. Accordingly, a clearing member would have either pay-in or pay-out obligations for funds
and securities separately. In the case of securities in the Trade for Trade Surveillance segment and auction
trades, obligations are determined on a gross basis i.e. every trade results into a deliverable and receivable
obligation of funds and securities. Members pay-in and pay-out obligations for funds and securities are
determined by 2.30 p.m. on T + 1 day and are downloaded to them so that they can settle their obligations on the
settlement day (T+2).
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. 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. Clearing members desirous of availing this facility shall send a
letter in the format provided in the Annexure.
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. Primary responsibility of settling these deals rests directly with the members
and the Exchange only monitors the settlement. The parties are required to report settlement of these deals to the
Exchange.

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

Rolling Settlement Trading

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

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).
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.

Limited Physical Market

Settlement for trades is done on a trade-for-trade basis and delivery obligations arise out of each trade. The
settlement cycle for this segment is same as for the rolling settlement viz:
Activity

Day

Trading

Rolling Settlement Trading

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

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. The delivering member is required to rectify these within two days. 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.e. not as required under guideline No.100 or 109 of SEBI Good/Bad
delivery guidelines), within 7 days of lodgement against him. If the CM is unable to rectify/replace defective
documents on or before 21 days, 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. All objections, which are not bought-in, are
deemed closed out on the auction day at the closing price on the auction day plus 20%. This amount is credited to
the receiving member's account on the auction pay-out day.

nseindia.com

http://www.nseindia.com/products/content/derivatives/equities/settlement_mechanism.htm

Settlement Mechanism
Settlement of futures contracts on index and individual securities
+ Expand All | - 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.
The profits/ losses are computed as the difference between the trade price or the previous day's settlement price,
as the case may be, 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. This is
known as daily mark-to-market settlement.
Theoretical daily settlement price for unexpired futures contracts, which are not traded during the last half an hour
on a day, 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.
After daily settlement, all the open positions are reset to the daily settlement price.
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. The pay-in and pay-out of the mark-to-market settlement is on T+1
days (T = Trade day). The mark to market losses or profits are directly debited or credited to the CMs clearing
bank account.
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. The option can be exercised
once in a quarter (Jan-March, Apr-June, Jul-Sep & Oct-Dec). The option once exercised shall remain irrevocable
during that quarter. 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.
Clearing members who opt for payment of daily MTM settlement amount on a T+0 basis shall not be levied the
scaled up margins.
The pay-out of MTM settlement shall continue to be done on T+1 day basis.
Download file for market settlement. (.doc)

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.
+ Expand All | - Collapse All
Settlement of options contracts on index and individual securities
+ Expand All | - Collapse All

Daily Premium Settlement

Premium settlement is cash settled and settlement style is premium style. 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, at the end of each day.
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. This is known as daily premium
settlement.
CMs are responsible to collect and settle for the premium amounts from the TMs and their clients clearing and
settling through them.
The pay-in and pay-out of the premium settlement is on T+1 day (T = Trade day). The premium payable amount
and premium receivable amount are directly debited or credited to the CMs clearing bank account.

Final Exercise Settlement

Final Exercise settlement is effected for option positions at in-the-money strike prices existing at the close of
trading hours, on the expiration day of an option contract. Long positions at in-the money strike prices are
automatically assigned to short positions in option contracts with the same series, on a random basis.
For index options contracts and options contracts on individual securities, exercise style is European style. Final
Exercise is Automatic on expiry of the option contracts.
Option contracts, which have been exercised, shall be assigned and allocated to Clearing Members at the client
level.

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.
+ Expand All | - Collapse All