Settlement Cycle in Stock Market

1. Settlement Cycle
SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

2. In trading, there is a fixed time period for the settlement of trades as per terms
of contract. This time period is termed as Settlement Cycle.
In other words, Trade settlement period refers to the time between the trade
day that an order is executed in the market and the settlement date when a
trade is considered final.
During the settlement period, the buyer must pay for the shares, and the seller
must deliver the shares. On the last day of the settlement period, the buyer
becomes the holder of record of the security.
For equity trades: Currently all trades are settled on T+2 settlement cycle.
For derivatives/currency/commodities: Currently all trades are being mark
to market at the closing price of contract and mark to market requirement
are settled at T+1.
For arriving at the settlement day all intervening holidays, which include bank
holidays, NSE holidays, Saturdays and Sundays are excluded.
Definition

3. Normal/Rolling Settlement-
A Settlement Cycle refers to a calendar according to which all purchase and
sale transactions done on T Day are settled on a T+2 basis. T = Trading Day
and +2 means 2 consecutive working days after T (excluding all holidays).
Trade to Trade Settlement-
Trade to Trade settlement is a segment where shares can be traded only for
delivery. It means Trade to Trade shares cannot be traded on intraday basis.
Each share purchased /sold which is a part of this segment need to be taken
delivery by paying full amount.
Auction-
When the seller is unable to deliver the shares, the exchange initiate's an
auction to purchase the required quantity of the same share in the auction
market and give it to the buyer.
Types of Settlement Cycle

4. Day 1 (Trade Day) -
The day you make the transaction is referred to as the trade date, represented as ‘T
Day’.
Day 2 (T+1 Day) –
This is called “Buy Today, Sell Tomorrow” (BTST) or “Acquire Today, Sell Tomorrow”
(ATST). There is a risk involved, and you could be in trouble for selling a stock that
you don’t really own. Because the stock is not in your DEMAT account yet.
It’s a suggestion for the freshers in the market to do not do BTST (Buy Today Sell
Tomorrow) trades unless they understand the risk involvement.
From investor’s perspective, nothing happens on T+1 day. However, in the
background, the money required to purchase the shares is collected by the
exchange along with the exchange transaction charges and Security transaction tax.
Settlement Cycle from Buy Side

5. Day 3 (T+2 Day) -
On day 3 i.e. the T+2 day, around 11 AM shares are debited from the person
who want to sell the shares and credited to the brokerage with whom you are
trading, who will in turn credit it to your DEMAT account by end of the day.
Similarly, money that was debited from the investor and is credited to the
person who sold the shares.
Now the shares will start reflecting in the DEMAT.
So for all practical purposes, if you buy a share on day T Day, you can expect to
receive the shares in your DEMAT account only by end of T+2 day. The shares
are available for a transaction on T+3 day.
Now investors can sell their shares without any risk. This day called Settlement
day.

6. The day you sell the stocks is again called the trade day, represented as ‘T
Day’. The moment you sell the stock from your DEMAT account, the stock
gets blocked. Before the T+2 day, the blocked shares are given to the
exchange. On T+2 day you would receive the funds from the sale which will
be credited to your trading account after deduction of all applicable charges.
Settlement Cycle from Sell Side

7. Physical Settlement
Limited Physical Market : To provide an exit route for small investors holding
physical shares in securities the Exchange has provided a facility for such trading in
physical shares not exceeding 500 shares in the 'Limited Physical Market' (small
window).
Limited Physical Market (O) are settled in physical form.
Dematerialized Settlement
With the age of computers and the Depository Trust Company, securities no longer
need to be in certificate form. They can be registered and transferred electronically.
Dematerialization (DEMAT) is the move from physical certificates to electronic
bookkeeping. Actual stock certificates are then removed and retired from
circulation in exchange for electronic recording.
Normal Segment(N), Trade for Trade Surveillance(W), Retail Debt Market(D) and
Auction Normal (A) are settled in dematerialized mode.
Mode of Settlement

8. Limited Physical Market - Settlement for trades is done on a trade-for-trade
basis and delivery obligations arise out of each trade. The settlement cycle for
this segment is same as for the rolling settlement viz:
ACTIVITY DAY
Trading Rolling Settlement Trading T (Trading Day)
Clearing Custodial Confirmation T+1 working days
Delivery Generation T+1 working days
Settlement Securities and Funds pay in T+2 working days
Securities and Funds pay out T+2 working days
Post Settlement Assigning of shortages for close out T+2 working days
Reporting and pick-up of bad delivery T+4 working days
Close out of shortages T+4 working days
Replacement of bad delivery T+6 working days
Reporting of re-bad and pick-up T+8 working days
Close out of re-bad delivery T+9 working days

9.  Bad Deliveries –
Bad deliveries (deliveries which are prima facie defective) are required to be
reported to the clearing house within two days from the receipt of documents. The
delivering member is required to rectify these within two days. Un-rectified bad
deliveries are assigned to auction on the next day.
Company Objection –
The CM on whom company objection is lodged has an opportunity to withdraw the
objection if the objection is not valid or the documents are incomplete within 7 days
of lodgement against him. If the CM is unable to rectify/replace defective documents
on or before 21 days, NSE Clearing conducts a buying-in auction for the non-
rectified part of defective document on the next auction day through the trading
system of NSE. All objections, which are not bought-in, are deemed closed out on
the auction day at the closing price on the auction day plus 20%. This amount is
credited to the receiving member's account on the auction pay-out day.
Problems faced in Physical Settlement

10. ACTIVITY DAY
Trading Rolling Settlement Trading T (Trading Day)
Clearing Custodial Confirmation T+1 working days
Delivery Generation T+1 working days
Settlement Securities and Funds pay in T+2 working days
Securities and Funds pay out T+2 working days
Valuation Debit T+2 working days
Post Settlement Auction T+2 working days
Auction settlement T+3 working days
Bad Delivery Reporting T+4 working days
Rectified bad delivery pay-in and pay-out T+6 working days
Re-bad delivery reporting and pickup T+8 working days
Close out of re-bad delivery and funds pay-in &
pay-out
T+9 working days
Settlement Cycle for Rolling Settlement

11. Example

12. Securities and Exchange Commission (SEC) is reducing the settlement cycle
for broker-dealer transactions from a T+3 cycle to a T+2 cycle.
Instruments and their settlement dates:
• Certificates of deposit (CDs): Same day
• Commercial paper: Same day
• Government securities: Next business day
• Options: Next business day
• Spot foreign exchange (FX): Two business days
• U.S. equities: Two business days
• Corporate bonds: Two business days
• Municipal bonds: Two business days
• Fixed Income Securities(F) and Government Securities(G) for retail investors are
also settled at BSE on T+2 basis.

13. Illustration
Assume on 23rd June(Monday) you buy 100 shares of Reliance Industries at
Rs.1,000/- per share. The total buy value is Rs.100,000/- (100 * 1000). The
day you make the transaction is referred to as the trade date, represented as
‘T Day’. By the end of trade day, your broker will debit Rs.100,000/- and the
applicable charges towards your purchase. Assuming the trade is executed
through 5 paisa, the applicable charges would be as follows:
Chargeable Item Applicable Charges Amount
Brokerage
Zero charges on Equity Delivery or 0.01% or
Rs.20/- whichever is lower for intraday trades
Zero
Security
Transaction Charges
0.1% of the turnover 100/-
Transaction Charges 0.00325% of the turnover 3.25/-
GST 18% of Brokerage + Transaction charges 0.585/-
SEBI Charges Rs.10 per crore of transaction 0.1/
Total 103.93/-

14. So an amount of Rs.100,000/- plus Rs.103.93/- (which includes all the
applicable charges) totaling Rs.100,103.93/- will be debited from your
trading account the day you make the transaction. Do remember, the money
goes out of your account but the stock has not come into your DEMAT
account yet.
Also, on the same day, the broker generates a ‘contract note’ and sends you
a copy of the same. A contract note is like a bill generated detailing every
transaction you made. This is an important document that is worth saving for
future reference. A contract note typically shows a break up of all
transactions done during the day along with the trade reference number. It
also shows the breakup of charges charged by the broker.
Illustration Continued…

15. Regards
Uday Kiran Sahu
Roll no 39
MBA in Business Economics
(Finance)
Banaras Hindu University