What is Trade Settlement?

As of FY25, India boasts 10.7 crore unique investors who invest directly in the stock market. Understanding the concept of trade settlement, therefore, becomes necessary as it determines when you will receive your purchased securities in your Demat account.

What is the Trade Settlement in Investment?

As an investor or even if you are planning to invest, you might have heard the term, trade settlement. To explain it, let us resort to a hypothetical example:

• Suppose you are participating in the stock market and trading in securities like stocks via the National Stock Exchange or the Bombay Stock Exchange.
• Now, when you purchase a company stock, two important dates come into play, which are the transaction date or trade date and the settlement date.
• Assume that you buy 100 shares of a company at INR 200 each on September 19, 2025. This becomes your transaction or trade date.
• A trade settlement process is complete when your Demat account is credited with the securities after payment. As you have bought 100 shares on September 22, under a T+1 cycle, settlement completes on September 23 and reflects in your Demat account.

Settlement Date and Recent Amendments

Now that you know what a trade settlement is, let us take a deeper look at the concept of settlement date:

• From the example, you have a basic idea of the time by which you will receive your purchased shares. This date marks the official transaction completion date, and on this day, you gain ownership of your securities.
• From 2003 until January 2023, the Indian securities market followed the T+2 model for trade and settlement of securities.
• In January 2023, the SEBI introduced a model of T+1 settlement. It means your trade settles after only 1 day of placing a trade.
• Furthermore, SEBI has also announced an optional T+0 cycle for settling trades, where trades get settled on a transaction date itself.

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Types of Trade Settlements in the Indian Stock Market

In the Indian stock markets, two types of trade settlement happen and here is a clear depiction of both:

1. Spot Settlement

   Under this type, your trades in the stock market securities settle promptly, which typically follow the current T+1 model for rolling settlement cycle. This speeds up your transaction finalisation than before.

2. Forward Settlement

   In this type, both sides (buyer and the seller) agree to place a completion of a trade to a later date, like T+5 or T+7, which is outside a standard cycle.

Understanding Rolling Settlement

By now, you must have a clear idea about trade settlement with the concept of types of settlement. Now, take a look at this section to have a clear idea about rolling settlement:

• As per market terms, trades are settled on successive working days of the transaction
• Now that you are familiar with the T+2 or T+1 settlement cycle, these depict the concept of the rolling settlement.
• By working day, it means the concept excludes non-working days like weekends, bank holidays, and holidays applicable in exchanges.
• For example, if you buy 100 shares at INR 200 each on a Friday, your broker deducts the respective amount on the same day. However, you will receive the shares in your account by Monday.

When are Trades Settled on the BSE?

BSE, being one of the largest stock exchanges in the world, lists around 5000 companies, providing a wider option to invest in. If you are interested in investing in BSE-listed companies, note their trade settlement process:

• Any transaction you make in any securities group, be it equities or fixed securities, is settled by the T+1 cycle.
• Pay-in and Pay-out of securities settle on the trading day.
• An investor must make payment for securities purchased or deliver securities they sold within one working day after BSE’s payout is completed.

Trade settlement in NSE

If you invest in the NSE-listed companies, you must take note of their trade settlement cycle for your convenience:

Violations of Settlement

You must be careful about the following scenarios considered a violation of the settlement:

• If a particular seller fails to deliver their sold shares on a settlement date, it counts as a violation and is termed a short delivery.
• Non-payment happens when buyers fail to pay for securities they buy, which leads to settlement delays.
• Erroneous trade details, like faulty share price or share amount, cause discrepancies between buyers and sellers.

Conclusion

Trade settlement helps with smooth transactions between buyers and sellers in the stock market. Both NSE and BSE now follow a T+1 settlement cycle, where settlement completes 1 day after a transaction.

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Frequently Asked Questions

1. Which entities are involved in the process of trade settlement?

In the settlement process, entities such as the depositories, custodians, and the clearing corporation are involved.

2. What do pay-in and pay-out mean?

When you purchase security, the money you transfer to the seller refers to a pay-in. Conversely, the funds that the seller receives are the payout.

3. What does a bad delivery mean in investments?

If share transfers remain pending over the settlement date, due to a lack of compliance with the exchange norms, it is a bad delivery.