How the clearing and settlement process works in the Indian stock market

Summary:

Clearing and settlement is the transfer of funds and securities between buyers and sellers in the stock market. In India, the settlement cycle has changed from T+2 to T+1 for some securities, which means that trades are settled the next day instead of two days after.

You click 'buy,' and suddenly, you own shares worth a few thousand rupees in a company. It seems simple, but have you ever wondered what happens behind that click? How does the money leave your account, and how do the shares appear there?

This is where the clearing and settlement process in the stock market comes into play. It's like the traffic police of the stock market that directs crores of rupees and shares to the right places every day.

But how exactly does this process work? How does it handle daily transactions worth crores, ensuring buyers get shares and sellers get money?

Let’s break it down

What does trading shares mean?

Trading shares means buying and selling parts of a company. When you buy shares, you're buying a small piece of that company as a way to invest in it. If the company you invest in does well, the price of its shares increase, and you can make money. But if it does poorly, there's a risk that you could lose money.

What do you need to get started?

To start trading shares, you'll need two main things:

• A Demat account: A Demat account is an electronic storage space for holding your shares. It is a safe and secure way to store your shares and it allows you to trade them quickly and easily. You can open a Demat account with a stockbroker, such as Upstox within minutes.
• A bank account: A bank account is where you will keep the money you use to buy and sell shares. You will need to link your bank account to your Demat account in order to make trades. When you buy shares, the money will be transferred from your bank account to your Demat account. When you sell shares, the money will be transferred from your Demat account to your bank account.

Understanding the clearing and settlement process

If you're thinking about trading shares in India, it's important to know how the clearing and settlement process works. This process is handled by the National Securities Clearing Corporation Limited (NSCCL), a non-profit organization set up by the Securities and Exchange Board of India (SEBI) in 1995. NSCCL's job is to make sure everything goes smoothly when shares are bought and sold.

The clearing and settlement process is typically divided into two phases:

Clearing phase: The clearing phase is the process of matching buy and sell orders and determining the net amount of money that needs to be transferred and the net number of shares that needs to be delivered. This process is carried out by a clearing house, which is an independent entity that is not involved in the actual trading of shares.

Settlement phase: Settlement is when the money and shares actually change hands. In India, this used to take two days (T+2), but since March 2023, SEBI has made it faster. Now it's a T+1 settlement cycle. That means if you buy or sell a share today (the trading day), they get delivered or sold by the next day.

Placing the order: T-Day (trade day)

This is the day you place an order to buy or sell shares. The money for the trade will be debited or credited from your bank account on this day. However, the shares will not be transferred to your Demat account on this day.

Say, for instance, you decide to buy 50 shares of a company at ₹100 each and place the order to buy the shares. INR 5,000 (50 shares x INR 100) is withdrawn from your bank account. But you won't see the shares in your Demat account just yet.

Transfer of shares: T+1 Day (trade day + 1)

This is the day the shares are actually transferred to your Demat account. If you bought shares on T-Day, you will see them in your Demat account on T+1 Day. If you sold shares on T-Day, the money from the sale will be credited to your bank account on T+1 Day.

So, in the example we used, the day after you bought those 50 shares for INR 5,000, you will see them transferred into your Demat account. You are now the official owner of these shares, and they are securely held in your account.

How the clearing and settlement process works:

The clearing and settlement process unfolds according to the following, broad steps:

• You initiate an order to buy or sell shares through your broker.

• Your broker forwards your order to the stock exchange.

• The stock exchange finds a matching sell or buys order from another investor.

• Upon finding a match, the clearing house is notified and commences the clearing process.

• The clearing house calculates the total amount of money to be exchanged and the total number of shares to be transferred.

• The clearing house sends instructions to the brokers involved in the transaction.

• The brokers then direct their respective banks to execute the money transfer and share delivery.

• Finally, the money and shares are exchanged, and the trade is successfully settled.

If you want to learn more about the key participants in the clearing and settlement process, click here.

Key points to remember about the clearing and settlement process:

• Various charges such as brokerage fees, transaction charges, and the Securities Transaction Tax (STT) are levied during the clearing and settlement process that affects net returns.
• The T+1 settlement cycle may shift due to holidays and weekends, extending the time required for trade completion.
• Investors must ensure that sufficient funds are available in their linked bank accounts for the settlement of trades, in order to prevent cancellation of the trade.

Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.