Module 1   Introduction to Stock MarketsChapter 10

Clearing and Settlement Process

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10.1 – Market structure

The topic of clearing and settlement is super important to understand as it gives you a sense of the movement of money and funds between your account and, let’s just say, the stock market. For instance, when you buy a stock, say 100 shares of Marico, you need to clearly understand how long it takes for the broker to remit these 100 Marico shares to your Demat account. We can extend this to stock selling as well.

The lack of understanding of the clearing and settlement process could leave a void and leave you with many unanswered questions related to the market structure. Hence, for this reason, we will explore what happens behind the scenes from when you buy a stock to when it hits your DEMAT account.

Ch10titleWe will keep this discussion practical with a clear emphasis on what you need to know about clearing and settlement.

10.2 – What happens when you buy a stock?

Day 1 – The trade (T Day), Monday

Assume on a Monday, you buy 100 shares of Reliance Industries at Rs.1,000/- per share. The total buy value is Rs.1,00,000/- (100 * 1000). The day you make the transaction is the trade date; brokers refer to this as the ‘T Day.’  The assumption is that you intend to hold Reliance Industries in your Demat account for a few days or maybe years, and it is not an intraday trade.

When you place an order to buy, the broker quickly validates if you have the necessary funds. In this example, the order will go through only if you have Rs.1,00,000/- in your trading account; it will be rejected otherwise. Assuming the trade is executed through Zerodha, the applicable charges are –

Sl No Chargeable Item Applicable Charges Amount
01 Brokerage Zero for Equity Delivery. For intraday, charges are 0.03% or Rs.20/- whichever is lower, per executed order Zero
02 Security Transaction Charges(STT) 0.1% of the turnover 100/-
03 Exchange transaction Charges 0.00345% of the turnover 3.45/-
04 GST 18% of Brokerage + Transaction charges + SEBI charges 0.62/-
07 SEBI Charges Rs.10 per crore of transaction 0.12/-
Total 104.19/-

Additionally, Rs.15/- towards stamp duty is applicable. Stamp duty is charged at 0.015% on the buy side. Hence the total applicable charges are Rs.119.19. Note that these rates are subject to change; you can visit Zerodha’s Brokerage calculator to figure out the exact applicable rate when you wish to carry out a transaction.

So an amount of Rs.1,00,000 plus 119.19 totaling Rs.1,00,119.19/- is required to carry out this particular transaction. Remember, the money is blocked in your account when you place a trade, but the stock is yet to hit your DEMAT account.

Also, on the T day, the broker generates a ‘contract note’ and emails you the copy to your registered email id.  A contract note is like a bill detailing all your daily transactions. You can save the contract note for future reference. A contract note gives you a break up of all daily transactions and the trade reference number. It also shows the breakup of charges charged by the broker.

Day 2 – Trade Day + 1 (T+1 day, Tuesday)

Brokers refer to the day after the transaction day as T+1 day. On T+1 day, you can sell the stock you purchased the previous day.  If you do so, you are making a quick trade called “Buy Today, Sell Tomorrow” (BTST) or “Acquire Today, Sell Tomorrow” (ATST). Remember, the stock is not in your DEMAT account yet. Hence, a risk is involved, and you can be in trouble for selling a stock you don’t own. This doesn’t mean every time you make a BTST trade, you end up in trouble, but it does once in a way, especially when you trade stocks that are not liquid enough. I’d encourage you to read this article to understand the risks of a BTST trade.

If you are a fresher in the market, I suggest you do not get into BTST trades unless you understand the risk involved. Continuing the example, from your perspective, nothing happens on T+1 day.

To summarize – On T day, you placed an order to buy 1L worth of Reliance shares. The broker validated that you have the necessary funds. Upon validation, the funds were blocked by the broker. On T day, the broker runs a post-trade process, where an obligation amount equal to what’s payable (for purchase) and receivable (for sale) is posted to their respective ledgers. The shares you bought will show up in your trading terminal with a ‘T+1’ tag, indicating that the shares are available for you to sell if you wish. But doing so results in a T+1 or BTST transaction with its associated risk.

Day 3 – Trade Day + 2 (T+2 day, Wednesday)

On Day 3, also called T+2, the settlement is due to the exchange. Assuming the purchaser and seller are trading via two different brokers, the funds are debited from the buyer’s broker’s pool account by the clearing corporation and credited to the selling broker’s pool account. Also, on T+2 day, the shares will reflect in the purchaser’s DEMAT account, indicating that you own 100 shares of Reliance.

So for all practical purposes, if you buy a share on day T Day, you can expect to receive the shares will be fully settled in your Demat account only by the end of T+2 day.

10.3 – What happens when you sell a stock?

The day you sell the stocks is again referred to as the ‘T Day’. The stock gets blocked when you sell the stock from your DEMAT account, and by the end of the day, the stocks are ‘earmarked’ for settlement. Please refer the next section to know more on earmarking.

Before the T+2 day, the earmarked shares are delivered to the depositary. On settlement day, the blocked shares are debited from your demat account and moved to the clearing corporation for payin. Against the debit of such shares, you’d have received a credit for the sale after deducting all charges. You may be interested to note that you will receive 80% of the funds on T+1 and the remaining 20% on T+2. In other words, the seller will be settled fully on a T+2 basis, just like how the buyer is settled.

What transpires between T day and T+2 is a complex settlement process involving the stockbroker, clearing corporation, depositary, and the stock exchange. Each entity uploads and receives multiple files to ensure the transaction goes smoothly. As far as you are concerned, you need to remember that equity transactions are settled on T+2 basis, meaning, if you are a buyer, you will get the shares on T+2, and if you are a seller, the funds are credited on T+2 basis.

10.4 – Earmarking and T+1 settlement

Earlier, for the settlement of a sell trade, the broker would be required to debit shares from a selling client, hold the securities in the broker’s pool account and transfer the securities to the clearing corporation (CC) on T+2. Upon transfer, the client would receive a credit of funds against the sale, and the transaction would have been said to be settled. It was usual practice for brokers to debit shares on T day or T+1 day and transfer it to CC on T+2 (since the settlement is on T+2).

From the time the shares were debited until they were settled, the client shares lie in the broker’s pool account, possibly allowing a broker to misuse these securities. SEBI identified this as a potential risk and introduced “earmarking” for settlement. In this new earmarking system, shares are no longer debited from the client’s account; they are only earmarked for settlement. Think of earmarking as a temporary hold on the securities towards an upcoming settlement for the sale transaction initiated by the client.

On settlement day, the shares are debited from the investor’s account and credited to the clearing corporation. This new process eliminates the need for brokers to hold client shares in their pool account, thereby eliminating the risk that comes along. The new earmarking process has been made mandatory from November 2022.

By the way, our regulators are continuously working towards safeguarding retail investors from any possible pitfalls and, in the process, improving the efficiency of the market structure. One such effort is to move to a T+1 settlement for all equity settlements by March 2023.

Exciting times ahead 🙂

 


Key takeaways from this chapter

  1. The day you make a transaction, the trade date is referred to as the ‘T Day.’
  2. The broker must issue you a contract note for all transactions by the end of T day.
  3. When you buy a share, the same will be reflected in your DEMAT account by the end of T+2 day.
  4. All equity/stock settlements in India happen on a T+2 basis.
  5. When you sell shares, the shares are blocked immediately, and the sale proceeds are credited again on T +2 day
  6. Earmarking of shares was introduced to ensure the securities dont move out of client’s demat account to the broker’s pool account

2,736 comments

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  1. Praveen says:

    In case of there is a bank/DP holiday on T+2 day, will the shares still shown under T1 holdings?

    • Suchetha says:

      Yes. If there is a bank/DP holiday on T+2 day, the shares will still show up in the T1 holdings in day 1 and 2.
      For example : If shares are bought on 8th November and 10th November is a settlement holiday, the shares will reflect in the T1 holdings on 9th and 10th November and the client can sell after the 13th November.

      • Vijay says:

        I have question if I sell one share after it got credited in Demat account. What are the charges I need to pay for it. Thanks.

        • Karthik Rangappa says:

          Hi Vijay, there is no brokerage for the sell transaction. However you will have to have to pay DP charges of Rs.13.5/- irrespective of the quantity sold. I’d suggest you take a look at this – https://zerodha.com/charges.

          • Diptiranjan Parida says:

            When the DP charges are debited from the trading account?

          • Karthik Rangappa says:

            When you sell shares from DP.

          • Sumit Kumar Pandit says:

            Hi Karthik,
            I am confused about selling an instrument and settlement. Following is my understanding:
            1. If we buy an equity today we can sell on the same day and it will be called intraday trade. In this trade the equity never actually hits the demat account but we only trade the price difference.
            2. If we sell an equity on T+1 day, since buy orders are already sent to the exchange on T day-end, it is out of broker’s control and cannot be treated as intraday. Also, equities don’t hit demat on T+1 day and we sell equity that we don’t yet own resulting in shorting.
            3. This will lead to two different trades in portfolio viz., T day long trade and T+1 day short trade.
            4. If we sell equity on T+2 or beyond, we essentially sell the equity that we own in our demat.
            5. Regarding our profits, all profits are available only on the next day of settlement except for intraday which is made available on the same day end. And our T+1 trade was not a settlement at all.
            Kindly correct if I am wrong in above understanding. Now following are my questions:
            A. Are these same rules applicable on futures/options also?
            B. Are futures/options being just contracts can be bought and sold anytime i.e., intraday, T+1 and T+2 and beyond?
            C. If they have different rules, please explain.
            Thanks,
            Sumit Kumar Pandit

          • Karthik Rangappa says:

            1) Yes, this is correct
            2) Yes, this is correct as well
            3) This will be a BTST trade, suggest you read this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/btstatst-buyacquire-today-sell-tomorrow
            4) Yes, sell would be from DEMAT
            5) Yes

            A) The settlement is slightly different. I’d suggest you read the Futures module – https://zerodha.com/varsity/module/futures-trading/
            B) Yes, these can be bought and sold anytime. Your holding period can be as small as 30 Seconds.
            C) Please go through the module on derivatives.

          • Prateek Lal says:

            Hi Karthik, thanks for curating such great and educative content @varsity. Could you please refer me to the Derivatives section where I could read all about CO and BO. I couldn’t find the derivatives module.

          • Karthik Rangappa says:

            Glad you liked it, Prateek. We have divided the derivative across 3 modules –

            1) Futures – https://zerodha.com/varsity/module/futures-trading/
            2) Options Theory – https://zerodha.com/varsity/module/option-theory/
            3) Option Stratergies – https://zerodha.com/varsity/module/option-strategies/

            BO/CO is a part of the Futures module.

    • karan agrawal says:

      hello sir i am karan . i am not able to sell my stocks…i am trying to sell my stocks from over 1month but some other user ADMINSQF1 is buying it …whats that …..what should i do????

    • Dharmveer Choudhary says:

      If i sell my shares on Thursday when i will able to transfer money in my bank account from Trading account?

    • Avinash says:

      I want to ask one question I am using Zerodha So what happen in the case where I sold X company shares and amount is reflected immediately as free cash with same figure as -minus in margins and if I used this same amount shown in -margins for purchasing Y company shares do it deduct some charges for it apart from normal brokerage charges…???

      • Karthik Rangappa says:

        All applicable charges will be deducted, Avinash. You should buffer for this before buying Y to avoid any -ve balance in your trading account. Check this to know about all the charges – https://zerodha.com/charges

        • Kunal Kothari says:

          I have the same question.
          1) If I sell “Stock/Bond/InvIT/FMP X” for Rs 1000 today, and want to buy “Company Y” shares the same day for Rs 950, is it possible, or do I have to wait for T+2 after the sale before I can buy with the Rs 1000?
          2) What if I have units worth Rs 1000 of Liquid Bees/ETF of Reliance/DSP? Do I have to sell the units before or after I buy “Company Y” stock? (I assume at least in this case I don’t need to wait for T+2 before buying)
          Thanks in advance!

          • Karthik Rangappa says:

            1) We provide you credit to the extent of the shares sold on the same day. So you can buy Y shares the same day. But do account for the applicable charges
            2) Its the same, you get credit to the extent of sale. So you can buy shares of Y the same day.

    • Sandeep says:

      I sold shares at 5000/- profit still my free cash and margin used are same
      When will it get changed

      • Karthik Rangappa says:

        The settlement is on a T+2 basis, but you will have the margins available on your dashboard. I’d suggest you call the support desk to check this once. Thanks.

    • Arvind kumar singh says:

      Sir main 20/12/2018(Thursday) ko intraday me 185/- profit earned kiya but abhi tk profit hmare Demat account me nhi credit kiya gya hai.

    • Ankit Chandra says:

      If i am buying one share on MIS option and after buying rate is going down and wish to take delivery then how to retain that share and stop selling on market rate at the end of the day?

      • Karthik Rangappa says:

        Ankit, you can do a simple position conversion here. Doing so the MIS position will be converted to a CNC buy and you can carry forward the position overnight.

  2. Surya says:

    How does the intraday buy and sell work in this case? Does it mean in case of intraday trading we are essentially selling the shares that are not with us?

  3. udit says:

    if i buy share om friday ,what will be t+1 day and t+2 day??

  4. udit says:

    if i by share in CNC and sell on same day ,which brokerage i have to pay intraday or delivery ?

  5. Harish says:

    How to transfer money from bank to trading account and vice versa?

    • Karthik Rangappa says:

      You can do this by clicking on the ‘Fund Transfer’ option. Through this you can bring money into your trading account or take money out of your trading account (back to your bank account).

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