In stock market parlance settlement means completion of a transaction where-in the buyer gets delivery to the shares bought and the seller receives the payment for the same. The time taken to do this is the settlement period. The settlement period is the time gap between the date of trade and the date of settlement. It is a two-way process of transfer of funds and securities on the settlement date. The in-between period is when the clearing of trades are done. The clearing is the process of determination of obligations before it is settled. Trading, clearing and settlement is thus an integrated process.
We cannot talk about settlement in isolation. Clearing leads to settlement. Clearing and settlement involve other market participants listed below who are an integral part of the entire process of trade to transfer.
The important settlement types as per NSE are as follows:
BSE generates Delivery and Receive Orders for transactions done by the Members in A, B, and F and G group Securities after netting purchase and sale transactions in each Security whereas Delivery and Receive Orders for “T”, “C” & “Z” group Securities and Securities which are traded on BSE on “trade-to-trade” basis are generated on a gross basis, i.e., without netting of purchase and sell transactions in a Security. However, the funds’ obligations for the Members are netted for transactions across all groups of securities.
SEBI has been pushing for a T+1 settlement. The stock exchanges have declared that they shall implement the same in a phased manner starting February 25, 2022. All listed stocks will be ranked in descending order and the bottom 100 stocks will be introduced to T+1 settlement. Thereafter from March, on the last Friday of every month, the next bottom 500 stocks will be introduced. The idea of T+1 will reduce systemic risk and improve liquidity.
The time taken between the date of trade and the date of transfer of cash and securities is known as the settlement period.
The present settlement is T+2 days, i.e., meaning the settlement will be done on the second day after the date of the trade. This settlement is known as rolling/normal settlement.
There are 3 main types of settlement
Trade to trade settlement is one where transactions are delivery of shares and no intraday trade is permitted. If you buy trade to trade shares you have to take delivery by paying in cash. And if you are selling trade to trade shares you have to give delivery.
If a seller fails to deliver the shares in T+2 days, the exchange will initiate an auction to purchase the required quantity of the same share in the auction market on T+2 days and give it to the buyer on T+3 days. Auction settlement happens in T+3 days. The seller is penalised for not delivering the shares.
Open Demat Account &
Trade @ Rs15 per order.