Looking back on history, we realize how far our world has advanced. The same goes for our stock market.
From physical documents to a seamless experience with Demat accounts, we have come a long way.
When we buy a stock, the amount is debited from our account, and credited to the seller. Then, the stocks are transferred to our account from the seller.
Sometimes, we take this process for granted and don’t understand why it works this way.
To ensure such a smooth process with minimal risk, the regulators of the Indian Market have designed a clearing and settlement process. As investors, we need not know the technical details of the process, but rather just understand the process in general.
Clearing And Settlement Process
Trade Execution: When you put in your buy or sell order
Clearing: The broker and stock exchange identify the number of shares, and amount of money involved in the transaction. Done on T+1 Day
Settlement: The money is credited to the seller, and the stocks are credited to the buyer’s Demat account.
- In the clearing and settlement process in the Indian stock market, there are 3 important days.
- These days are T-day (trade day), T+1 day, and T+2 day.
- Let us take a small example to further understand this concept.
- If you buy 100 shares of SBI, this day is known as T-day. Once the trading session ends, the amount is debited from your account.
- On T+1 day, the stock exchange collects the money from the broker. That is all that happens today.
- On T+2 day, the shares are debited from the seller’s account and credited to your broker’s account. Then, by the end of the day, the shares are in your account.
- Currently, the clearing and settlement process is completed in T+2 days. The SEBI is working on a rule that will reduce the process to T+1 day, but it is not in effect yet.
- The same applies to selling
- On T-day, the shares are blocked in your Demat account
- T+1 day, the shares are delivered to the exchange
- On T+2 day, the money is credited to your account.
Entities Involved In The Process
- Depository: Since every investor, broker and other intermediaries own a Demat account, there needs to be a body that takes care of all the Demat accounts. Hence SEBI has made an entity called the Depository. The Depository is in charge of all Demat accounts.
- Clearing Corporation: This corporation is associated with the stock exchange, and is in charge of clearing and settling all of the shares in these types of transactions. It ensures that the process is on time while keeping it risk-free
- Clearing Custodians: The clearing corporation transfers the shares to the clearing custodians, and they make sure that the shares are ready for transaction on T+2 day
- Clearing Banks: These banks are in charge of clearing all the funds involved in the process of clearing and settling. SEBI has made a list of 15 banks that are responsible for this.
As traders in the stock market, you should now know the clearing and settlement. This knowledge allows you to appreciate the level of planning in the market, and how the SEBI keeps track of the market and ensures that it runs smoothly.
