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Trading, Clearing and Settlement of Equity Shares in India

BY: Vivek SHARMA | Category: Finance | Submitted: 2010-11-29 11:54:23
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Article Summary: "This article provides detail of how trading, clearing and settlement of equity shares happen in Indian stock exchanges..."


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Stock market is a trading platform which provides an opportunity to buyers and sellers of securities to do transactions. Even though there are many stock exchanges in India, majority of transactions in securities happen on the National Stock Exchange. The Bombay stock Exchange is the second largest contributor in the overall pie of total transactions. However, its contribution is restricted to 5 - 7 percent only in overall trading of securities.

There are three types of instruments that are traded on the 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 format. 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 the 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 with the help of a sophisticated electronic network 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 9:00 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. 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 are also required to 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 a 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 supposed 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 is created. On T+2 days, all the brokers who have 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 has been the reduction in the settlement cycle that 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 the inherent strength of the economy but also due to the advancement of the stock markets that made outsiders to understand the process in Indian market easily.

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