There are three phases in a secondary market transaction:
• Trading
SETTLEMENT PROCEDURE IN THE
INDIAN STOCK MARKET
CLEARING
• Once two orders match and a trade is executed, the clearing
process takes place. Clearing is the identification of what security
is owed to the buyer and how much money is owed to the seller.
The entire process is managed by ‘clearing houses’. These are
independent entities.
• However, in the real market scenario, traders tend to conduct
multiple transactions. As a result, the clearing house identifies all
the transactions and the net amount or net securities owed to the
trader are calculated
• Clearing
• Settlement
• Trading
• In the stock market, a large number of trades occur simultaneously. The stock
exchanges use an electronic order matching system to match ‘buy’ and ‘sell’
orders from different traders. This way, each trade is executed.
• For instance, imagine that stock ‘x’ is trading in the stock market.
SETTLEMENT
• The next step is to fulfil the financial obligations identified in the clearing step.
This involves the transaction settlement for the buyers and sellers.
• So once the buyer receives the security and the seller receives the payment, the
transaction is settled.
 • The settlement of funds takes place through clearing banks. Every clearing
member is required to open a clearing account with one of the following 13
PARTICIPANTS INVOLVED IN THE PROCESS clearing banks
• HDFC BANK
Clearing corporation
• ICICI BANK LTD
• Clearing corporation is one of the major participants involved in clearing and
• AXIS BANK LTD
settlement process in stock market. The responsibility for clearing and settlement of
trade executed at the stock exchange lies on the national securities clearing • KOTAK MAHINDRA BANK
corporation limited (NSCCL). It is also in charge of risk management and is • JP MORGAN CHASE BANK
obligated for meeting all settlement regardless of the member defaults. • STATE BANK OF INDIA
Clearing members/custodians • HSBC BANK
• They are another participant in the clearing and settlement process in Indian stock • STOCK HOLDING CORPORATION OF INDIA LTD
market. When trading members place deals in the stock exchange, the same is • INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD,
moved to NSCCL, which transfers them to the clearing members. The clearing
• DEUTSCHE BANK, STANDARD CHARTERED BANK
member is in charge of determining the position of share to suit the trade.
• ORBIS FINANCIAL CORPORATION LTD
Clearing banks
• DBS BANK
• Clearing banks are responsible for the settlement of funds. There are 13 clearing • CITIBANK
banks, and each clearing member needs to open a clearing account with either one
of them. In case of a pay-out, clearing members receive funds in the clearing The clearing members receive funds in case of a pay-out in the clearing account
account and in case of pay-in they need to make funds available. or are to make funds available in the clearing account in case of a pay-in.

Depositories
• There are two depositories in India – national securities depository limited
NSE CLEARING HAS FOLLOWING CATEGORIES
(NSDL) and central depository services limited (CDSL). These two depositories OF CLEARING MEMBERS
hold Demat account, and clearing members also need to maintain a clearing
• TRADING MEMBER CLEARING MEMBER (TM-CM)
pool account with them.
A clearing member who is also a TM. Such CMs may clear and settle their own proprietary trades, their
• Clearing members need to transfer the securities to the clearing pool account
clients' trades as well as trades of other tm's & custodial participants
they hold with the depositories on the date of settlement.
• PROFESSIONAL CLEARING MEMBER (PCM)
A CM who is not a TM. Typically banks or custodians could become a PCM and clear and settle for
Professional clearing members
TM's as well as of the custodial participants
• These are special category members appointed by the NSCCL. However, note
• SELF CLEARING MEMBER (SCM)
that they are not allowed to trade, and they can only clear and settle trades
executed for their clients. Professional clearing members generally constitute A clearing member who is also a TM. Such CMs may clear and settle only their own proprietary trades
banks, custodians, etc. and their clients' trades but cannot clear and settle trades of other TM's.
• CUSTODIAN- A custodian clearing member settle trades of custodian participant client’s
 CLEARING AND STOCK TRADE
SETTLEMENT PROCESS

NSE Clearing follows a T+1 rolling settlement cycle. For all trades
executed on the T day, NSE Clearing determines the provisional
cumulative obligations of each member on the T day and
electronically transfers the data to Clearing Members (CMs). All
trades concluded during a particular trading date are settled on a
Rolling Settlement
designated settlement day i.e. T+1 day. In case of short deliveries
on the T+1 day in the normal segment, NSE Clearing conducts a In a rolling settlement, for all trades executed on trading day .i.e. T day the
buy –in auction on the T+1 day itself and the settlement for the provisional obligations are determined on the T day, final obligations is generated by
same is completed on the T+2 day, whereas in case of Z settlement 8:30 am on T+1 and settlement on T+1 basis i.e. on the 2nd working day. For
Type there is a direct close out. For arriving at the settlement day arriving at the settlement day all intervening holidays, which include bank holidays,
all intervening holidays, which include bank holidays, NSE NSE holidays, Saturdays and Sundays are excluded.
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.
 EXAMPLE
A TABULAR REPRESENTATION OF THE
SETTLEMENT CYCLE FOR ROLLING Day 01 – June 22, 2020

SETTLEMENT • Let’s say that you buy 100 shares of HDFC bank ltd. On June 22, 2020,
at Rs.500 per share. Therefore, the total purchase price is rs.50,000.
• The day you purchase the shares is known as the trade day or T
day.
• Once the trading day ends, your broker debits rs.50,000 plus the
brokerage and all associated charges from your linked banking account.
However, the stocks are yet to reach your Demat account. The broker
also shares a contract note that details all the transactions done during
the day along with the breakup of charges made by your broker. This is
like a bill that you need to preserve for future reference.

Day 02 – June 23, 2020

• The day after you purchase the shares is known as trade day + 1 or T+1
day.
• Nothing happens on this day. The money is still debited from your
banking account but you haven’t received the shares yet.
• Even if you don’t have the shares in your account, you can sell the
ones that you bought yesterday
• The stock exchange collects the purchase amount and charges
from the broker on T+1 day.
Day 03 – June 24, 2020
• The second day after you purchase the shares is known as trade
day + 2 or T+2 day.
• On the T+2 day, the shares are debited from the Demat account of
the person who sold them and credited to your broker’s account.
Your broker credits them to your Demat account by the end of the
day. On the same day, the money that was debited from your
banking account is credited to the seller’s banking account.
• So, in a nutshell, when you buy shares, on t day, the money gets
debited on the same day and you receive the shares on T+2 day.
 Clearing and settlement process when you
sell a share S
• Using the example cited above, the process is as follows:
• You sell shares on June 22, 2020 (day 01 or T day). The
shares are blocked in your Demat account immediately.
Hence, you cannot sell the same shares again.
• On day 02 (T+1 day), the broker gives the shares to the
exchange.
• On day 03 (T+2 day), you receive funds in your banking
account post deduction of all charges.
• HERE IS A QUICK OVERVIEW OF THE ACTUAL PROCESS OF CLEARING AND
SETTLEMENT IN THE STOCK MARKET:
• The stock exchange transfers the details of every trade to the clearing
corporation on T day.
• The clearing corporation informs the clearing members and custodians
about the details of the trade and asks them to confirm if they are
willing to settle the trade or not. Upon receiving the confirmation, the
clearing corporation determines the obligations of the clearing member
or custodian.
• The clearing corporation sends the details of the obligations and pay-in
advice of securities or funds to each clearing member/custodian.
• Once the details are received, the clearing members or custodians to:
• Clearing banks to make the funds available; and
• Depositories to make securities available by the pay-in time
Hence, this process is divided into three parts:
• Trade execution – where the buy or sell order is executed by you.
This happens on T day.
• Clearing – where the responsible entity identifies the number of
shares that the seller owes and the amount of money that the
buyer owes for every trade. It also determines the obligation of all
parties and assesses risk. This is done on T+1 day.
• Settlement – where the shares are moved from the seller’s
account to the buyer’s account and the money is moved from the
buyer to the seller. This is done on T+2 day.
• The clearing corporation receives funds and securities from the clearing banks
and depositories for purchase and sale transactions respectively. So, if a
clearing member is settling a purchase transaction, then the corporation
receives the money in its clearing account via the clearing bank. Also, for sale
transactions, the corporation receives securities in its pool account via the
depository.
• Once this is done, it instructs the depositories and clearing banks to transfer
the securities and funds to clearing members/custodians for purchase and sale
transactions. So, if a clearing member is settling a purchase transaction, then
the corporation transfers securities to its pool account. Also, for sale
transactions, the corporation transfers money to the clearing account via the
clearing bank.
• There are many ways in which SEBI ensures that the clearing and settlement
process ensures market integrity by becoming the counterparty to each trade.
This is essential to ensuring the availability of liquid and effective markets.
 COMPULSORY ROLLING SEGMENT (CRS)
• Years back, NSE had a weekly settlement cycle where the trades got settled
every Tuesday. This came down to T+3 and presently, the exchange follows a
T+2 settlement cycle.
• A rolling settlement is a method of settling asset trades on continuous days
depending on the particular date on which the original trade was placed. The
trades that have been completed today will have a settlement date one working
day later than trades that were completed yesterday.
• This is not on the same lines with account settlement, in which all trades are
completely executed at one time in a set period of days. This is done irrespective
of when the trades were completed. Trade settlement refers to the time at which
the security was delivered after the completion of the trade.
• Under rolling settlement, the investors trading on a particular day are treated
differently from the investors trading on the preceding or succeeding day. All of
them wait for “X” days from the trade date for settlement. Further, the gap between
the trade date and the settlement date is less under rolling settlement making both
securities and funds easily convertible.
• The account period settlement combines the features of cash as well as futures
markets and hence distorts price discovery process. In contrast, rolling settlement,
which segregates cash and futures markets and thereby removes excessive
speculation, helps in better price discovery.
• Account period settlement allows build up of large positions over a trading period of
five days and consequently, there is a pressure to close them out on the last trading
day, leading to significant market volatility. This does not happen under rolling
settlement, where positions can be built during a day only. There is scope for both
intra-settlement and intra-day speculation under account period settlement, which
allows large outstanding positions and hence poses greater settlement risks. In
contrast, since all open positions under rolling settlement at the end of a date ‘T’
are necessarily settled ‘X’ working days later, it limits the outstanding positions and
reduces settlement risk. · Till recently, it was possible to shift positions from one
exchange to another under account period as they follow different trading cycles.
Rolling settlement took care of this by making trading cycle uniform
WHAT IS AN ACCOUNT PERIOD SETTLEMENT?
• An account period settlement is a settlement where the trades pertaining to a
period stretching over more than one day are settled. For example, trades for
the period Monday to Friday are settled together. The obligations for the
account period are settled on a net basis. Account period settlement has been
discontinued since January 1, 2002, pursuant to SEBI directives.
• The account period settlement does not discriminate between an investor
transacting on the first day and an investor transacting on the last day of the
trading period, as trades are clubbed together for the purposes of settlement
and all investors realize the securities and/or funds together. Hence some
investors have to wait longer for settlement of their transactions.
• Investors who participate in account settlement will see all of the trades placed
within a defined period of time settling on the same day. As an example, if an
institution settles all trades that take place the 1st through the 15th of the
month on the 16th of the month, all investors who placed trades
throughout that period will see their settlements on the same day. An investor
who has purchased security will not receive the security in their account and
officially own that security until the trade has settled.
WHAT IS ROLLING SETTLEMENT CYCLE?
• Rolling settlement is a system to settle share transactions in predefined number
or days. It is a mechanism of settling trades done on a stock exchange on the
Day of Trade (T) plus "X" trading days. "X" trading days could be any number of
days like 1,2,3,4 or 5 days. So, if we say the rolling settlement for a transaction
is T+3 then it means that the transaction will be settled in TODAY + Next 3
Days. In other words, in T+3 environment, a trade done on T day is settled on
the 3rd working day excluding the T day.
• In Rolling Settlements, share trading done on each single day are settled
separately from the trades done on earlier or subsequent trading days.
• In India, after April 1, 2002, all trades done on stock exchange are settled on
T+3 basis. There could be some deviations because of Bank Closing or National
Holidays
• At NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on
the 2nd working day. Saturdays and Sundays are excluded because the stock
exchanges remain closed on weekends.
 ROLLING SETTLEMENT
• Securities being sold on the secondary market typically settle after
the completion of three working days from the original trade date.
• Settlement of shares in India is done on a T+2 basis. What this
means is that your settlement would be done after 2 days of the
trade being executed.
• This is what the T+2 settlement in India means when trading in
shares. In rolling settlement of shares what takes place is nothing
but the settlement everyday on a rolling basis, wherein trades are
settled everyday.