A Guide to Trade Settlement In India

A Guide to Trade Settlement In India

In the stock market, trade settlement involves the transfer of stock between sellers and buyers as well as the payment for that stock by the buyer. During the transaction, the buyer receives securities and the seller receives payments.

Also, different stock exchanges have different trade settlement processes. The Bombay Stock Exchange (BSE) settles the trades of all securities within a two-day period, including equity, government, and fixed income. As with the NSE, the National Stock Exchange follows a rolling equity settlement process. This ensures a smooth and orderly transaction cycle over several working days.

In order to ensure timely and secure trading of securities and funds, investors and traders must understand what trade settlement is and the processes followed by different stock exchanges. In this article, we will explore what trade settlement is, its types, and its significance in the stock market.

What is Trade Settlement?

What is trade settlement - It is the process of moving stocks into a buyer’s account and cash into a seller's account. It is a two-way process, where the buyer receives the securities and the seller gets the payments. 

You begin by choosing a broker or sub-broker and end by settling your shares. Additionally, to trade on the secondary market, you must open a Demat account with a bank or broker. Once your account is operational, you can buy and sell securities. When your order is executed and a contract note is issued, your deal is sealed.

What is the Trade Settlement Date?

Two important dates are involved in the purchase or sale of securities: the transaction date (also known as the trade date) and the settlement date.

Transaction dates mark the day when a transaction occurs, whereas settlement dates mark the day when the transaction is complete, meaning that the buyer receives possession. Also, transaction dates never change, and are represented by the letter 'T'.

In most cases, the final settlement takes place on a different day than the original settlement date. Generally, settlement occurs on T+2.  

What are Trade Settlement Types in the Stock Market?

The final stage of a trade order in the stock market is a settlement, which can be divided into two categories:

Spot Settlement

Forward Settlement

In this case, the settlement is made immediately after the T+2 rolling settlement principle has been applied.

In this settlement, you agree to settle the trade at a later time, such as T+5 or T+7.

What is Rolling Settlement?

In a rolling settlement, the trade settlement is made on successive days after the trade takes place. Typically, rolling settlements take T+2 days. Here is an example of a T+2 settlement: If you place your buy order on Monday, the shares will be credited into your account by Wednesday, assuming there's no holiday and the markets are open Monday through Wednesday. If you buy a stock on Friday, you'll get the shares deposited into your account the following Tuesday. 

What is the Trade Settlement Process In BSE?

After you've learned what trade settlement is, let's take a look at how the BSE settles its trades. All securities traded on the BSE are settled in "T+2" days, including equity, government, and fixed income. According to BSE rules, money and securities must be paid in and paid out on the same day. Upon payment by the BSE, the securities are delivered to the clients within one working day.

What is the Trade Settlement Process In NSE?

In terms of rolling equity settlements, the National Stock Exchange (NSE) follows the following process:
 

Working Days

Activity

T

Rolling settlement trading

T+ 1

The clearing process, which includes confirmation of custody and delivery generation,

T+2

Settlement through the payment in and payment out of securities and funds

T+2

Post settlement auction

T+ 3

Auction settlement

T+ 4

Reporting for bad deliveries

T+ 6

Pay-in-pay-out of rectified bad deliveries

T+ 8

Re-reporting of bad deliveries

T+ 9

Closing of re-bad deliveries

Conclusion

As a simple answer to what is trade settlement- This system is to ensure that buyers receive securities and sellers receive payments. Typically, settlement takes place two days after the transaction date. 

Different types of settlement exist, such as spot settlement and forward settlement. Additionally, the rolling settlement is a method of settlement that involves settlement on successive days. Moreover, the BSE settles trades within two days, while the NSE takes a few days to settle.

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What is Trade Settlement FAQs

Trade settlement is responsible for the entire post-trade process, including connection of trades with counterparties, matching/confirmation/affirmation of trades, as well as resolving exceptions.

When the buyer receives the securities and the seller receives payment, this process is called trade settlement. Officially, the transaction takes place on transaction day, but the final ownership transfer happens on settlement day. Furthermore, the transaction date never changes.

The reason traders take 2 days to settle is to allow the seller to collect necessary documents and the purchaser to clear the funds required for settlement.

For all traded instruments on Indian exchanges, the settlement cycle is T+2 days, with T representing the trading day.

No. If you bought the shares with unsettled funds, you cannot sell them until the funds are settled.