To facilitate the completion of financial transactions in a secure and timely manner, a clearing and settlement process is adopted by the Securities and Exchange Board of India. (SEBI). During the clearing stage, the executed trades are checked, verified, and reconciled to maintain accuracy. CCPs (Cеntral Countеrpartiеs) are pivotal bodies that overlook the fulfilment of transactions and minimise the risk of counterparty by playing the roles of intermediaries between buyers and sellers. After the deals have been cleared, the settlement process begins, where securities and funds are finally exchanged. This stage ensures the delivery of securities from the seller to the buyer and transfer of funds from the buyer to the seller.
As per the latest SEBI guidelines, all F&O equities and the rest of the shares in the T+2 settlement cycle have been moved to the T+1 cycle from 27 January 2024. In this article, we will take a detailed look at the clearing and settlement process in stock markets.
Note: SEBI introduced the beta version of the T+0 rolling settlement cycle on an optional basis, which came into effect on March 28, 2024.
Additional read: Stock split
How does clearing and settlement work when a share is bought?
You need to open a Demat account for trading purposes and holding the stock, along with a bank account for handling financial transactions, i.e., buying or selling of shares.
- T-Day: Also known as Trade Day, T-Day is when you purchase a share. On this day, the broker gives you a contract note for transactions and expenses, similar to a stock purchase bill. At this point, your money from the bank account will be debited, but the stock will not yet be delivered to your Demat account.
- T+1 Day: Day 2, or the day after you buy the shares, is known as Trade Day + 1 or T+1 Day. On this day, the broker’s expenses and payment for purchased shares are sent to the exchange. Similarly, the acquired shares are sent to the broker’s account, and the seller’s dematerialised account is debited.
Following this, your dematerialised account is credited with the concerned stock by your broker. Likewise, the money is wired to the seller’s account, which was debited from your account to purchase shares.
The T+1 cycle mandates that settlements pertaining to trades have to be handled within 24 hours of completing the transaction. For example, if a trader buys a stock on Monday, it would be transferred to the Demat account on Tuesday. Likewise, if a trader sells the shares employing the T+1 settlement cycle, they will get the funds within 24 hours.
Additional read: Stock vs. ETF
How does a clearing and settlement procedure operate when a share is sold?
- T-Day: On this day, the shares sold are frozen in your Demat account. Once these shares are blocked, you cannot sell them again on the same day.
- T+1 Day: On this day, the broker transfers the stock to the exchange, and you get your funds in your bank account after additional fees are deducted.
Additional read: Stock market vs. commodity market
Bodies participating in the clearing and settlement process
- Depository: In the past, stocks were held in physical certificates, but now they must be held in dematerialised or electronic form, requiring a Demat account for stock transactions. With the introduction of depositories, SEBI has established an organised system to ensure the best possible performance and the highest control over dematerialised accounts. Every participating player, including brokers, investors and clearing parties, is mandated to hold a Demat account to invest or trade in the capital markets.
- Clearing corporation: Associated with the stock exchange, the clearing corporation verifies, settles, and delivers shares. It also plays the role of a purchaser for the seller and vice versa. Simply put, it enables buying on one side and selling on the other side of the transaction. The aim of a clearing corporation is to execute brief and consistent settlement cycles, mitigate transaction risks, and provide a counterparty risk guarantee.
- Clearing members/custodians: The clearing corporation is responsible for handing over every trade to a clearing member or a custodian. Their purpose is to ensure that shares and funds are available on the day of the exchange, i.e., T+1 day. Clearing members or custodians require a clearing pool dematerialised account, along with a depository for exchanging funds related to the trade.
- Clearing banks: SEBI has compiled a roster of 13 clearing banking organisations to streamline the movement of money for settlement. Clearing members must hold a clearing account with one of these banking institutions. If a buyer’s transaction is being settled, then the clearing member has to make sure that necessary funds are present in this bank account prior to the settlement process.
Additional read: Stock options
Closing thoughts
SEBI regulates and guards the stock market and its involved parties in many ways by acting as a counterparty for every trade in the clearing and settlement process. Their latest memo on the T+1 cycle has enabled a faster settlement period, which is highly convenient for both buyers and sellers.
