The sole intention of the stock market is to facilitate the exchange of securities between the buyers and sellers of shares.

The sole intention of the stock market is to facilitate the exchange of securities between the buyers and sellers of shares. So, every transaction in the stock market involves two parties, a buyer and a seller. When one individual buys a certain number of shares there is another who is ready to sell those shares. This transaction comes to an end or is settled when the buyer receives the shares and the seller receives consideration, for the same. So, have you ever wondered how the entire process works out – like when you buy shares how do they end up in your demat account? Or when you sell, how does the money come back in your ledger statement? This entire process forms a part of what is known as a ‘settlement cycle’.

In this video, we will help you to understand how the trade settlement cycle works in India. To begin with, let us first understand the term “Settlement Cycle”. Settlement Cycle refers to the period between the Trade Date, which means a period when an order is executed in the market and the Settlement Date, when a trade is considered final, with the buyer becoming the record holder of the shares. During this period, both the buyer and the seller must fulfill their obligations to complete the transaction. India is one of the most advanced nations when it comes to trade settlement and the market follows rolling settlement, i.e., T+2 settlement cycle. So here, T means trading day and 2 means two consecutive working days after T or trading day, excluding all holidays. Thus, the trades are settled on the second working day after the trade is executed.

However, derivatives/currency/commodities trades are settled mark to market at the closing price and are settled on a T+1 basis. Means the difference between closing price and the opening price of any trade is known as mark to market under derivatives/currency/commodities trades Our discussion in this video will be centered on Equity Trade. Once we have understood the term, let us now delve further to understand how the whole process of Trading, Clearing leading to Settlement works in a secondary market. The first step in the process involves placing a buy or a sell order with the broker, stating the desired price and quantity.

The broker then collects the order and passes them on to the stock exchanges- NSE or BSE. The stock exchanges use an electronic order matching system to match the costliest buy prices with the cheapest available sell prices, depending upon respective quantities and price asked for. So, the trading gets completed on the first day or T day. Once the order is matched and the trade gets executed, on the next day or on T+1 the clearing process gets started. Clearing is the process of identifying the securities owed to the buyer and the amount of money owed to the seller.

This task is managed by the clearinghouses or central counterparties, namely NSE Clearing Limited i.e. NSDL and Indian Clearing Corporation Limited i.e. CDSL. The clearing houses acts as a buyer to every seller and seller to every buyer, guaranteeing the settlement of all trades, in case a buyer or seller defaults. They match the buyer and seller and initiate the debit and credit process. Once the necessary obligations of fund transfer are done, they approve the deal and the process heads towards the settlement of shares or the money to the investor’s account. On T+2 Day or settlement day, the required obligations identified by the clearing corporations need to be fulfilled.

That is, the buyer’s Demat account should get credited with the shares he has bought while the seller’s bank account should reflect the sale consideration. This is better known as Pay-in and Pay-out day. The transfer of the required shares is facilitated by the depositories, NSDL and CDSL. These depositories act as an intermediary between the investor and the depository participant (brokers, banks, investment firms and others). They ensure that the required shares are made available through the pool account of members available with the depository participant and then transfer these shares to the account of the other party, on the pay-out day.

The buyer is informed about his obligations regarding the fund transfer, to ensure that the required fund is available on the pay-in day. Once the obligations are fulfilled by both the parties, the trade which gets executed is finally settled. Every trade placed in Indian Stock Market has to go through all these processes. This makes the settlement cycle one of the most important processes that help smoothen the transaction between a buyer and a seller. Once you understand the process well it will help you to understand the functioning of the stock market better. This will also make you aware of your obligations so that you do not falter at any step.