If you’ve ever wondered what happens after you buy or sell shares in the stock market, you’re not alone. Most people know how to place an order on a trading app, but what happens after that is something only a few understand.
This behind-the-scenes process is called the clearing and settlement process. It’s what ensures your money and shares are exchanged safely, accurately, and efficiently.
In this article, we’ll break down this process in simple terms, using examples to help you understand what goes on once your trade is placed.
What Is Clearing and Settlement?
- Clearing is the process of confirming the trade details, calculating how much money or shares need to be transferred, and ensuring both parties are ready to complete the trade.
- Settlement is when the actual exchange of money and securities takes place.
Think of it like ordering a pizza online
- Clearing is checking that your address is correct, the payment went through, and the restaurant has the right order.
- Settlement is when the pizza is delivered to your doorstep.
In the stock market, this entire process typically takes T+1 days, which means the trade is settled one working day after it is executed.
Why Is Clearing and Settlement Important?
Imagine buying something online and the seller vanishes after taking your money. Scary, right?
That’s why the clearing and settlement process is so crucial in the stock market. It:
- Ensures trust between buyers and sellers.
- Helps in avoiding fraud.
- Makes sure there’s no confusion or delay in the transfer of funds and shares.
Without a proper system, the market would be chaotic and risky for investors.
Key Entities Involved in the Clearing and Settlement Process
Several organisations work behind the scenes to ensure that your trade gets cleared and settled smoothly. Here are the main ones in India:
1. Stock Exchanges
Like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). These are the platforms where buyers and sellers come together to trade.
2. Clearing Corporation
In India, this is usually the NSCCL (NSE Clearing Limited) for NSE or the Indian Clearing Corporation Ltd (ICCL) for BSE.
They act like middlemen. Once a trade is confirmed on the stock exchange, it is passed on to the clearing corporation, which guarantees that both parties will honour the trade.
3. Depositories
They hold your shares in electronic form (just like a bank holds your money). In India, the two main depositories are:
- NSDL (National Securities Depository Limited)
- CDSL (Central Depository Services Limited)
4. Depository Participants (DPs)
These are like your bank branches. When you open a Demat account with a broker (like Zerodha, Upstox, or Groww), they act as your DP and give you access to the depository.
5. Custodians
These are mainly used by large institutions to hold and manage their securities.
Step-by-Step: How the Clearing and Settlement Process Works
Let’s say you buy 10 shares of Infosys at ₹1,500 each on the NSE. Here’s what happens after you hit ‘Buy’:
T Day (Trade Day)
- You place the order.
- The stock exchange matches your buy order with someone’s sell order.
- A trade is executed.
- You get a trade confirmation from your broker.
Clearing
- The clearing corporation steps in and confirms the trade details.
- It calculates the net obligations of both parties.
For example:
- You need to pay ₹15,000 (₹1,500 × 10).
- The seller needs to deliver 10 Infosys shares.
- Brokers are notified about how much cash or securities they need to provide.
T+1 Day (Settlement Day)
- You pay ₹15,000 from your trading account.
- The seller’s Demat account is debited with 10 shares.
- The clearing corporation ensures that:
- You receive 10 shares in your Demat account.
- The seller gets ₹15,000 in their account.
And just like that, the trade is settled.
T+1 Settlement Cycle: What Does It Mean?
Earlier, Indian stock markets followed a T+2 cycle, which meant settlement happened two days after the trade. But since January 2023, we have moved to a T+1 settlement cycle, making our system one of the fastest in the world. This means more efficiency and lower risk. It also frees up funds and shares faster, which is great news for retail investors.
What If There Is a Problem During Settlement?
Sometimes, the seller might not deliver the shares, or the buyer might not pay. In such cases:
- The clearing corporation steps in and completes the trade from its own pool.
- The defaulter is penalised.
- If needed, the shares are bought from the open market, and the buyer is compensated.
This is why clearing corporations are considered a strong backbone of the stock market—they ensure trades don’t fail.
What Is the Meaning of Clearing and Settlement in Financial Terms?
- Clearing refers to the process of reconciling buy and sell orders and preparing them for settlement.
- Settlement is the final step where securities and cash are exchanged.
Together, they form the engine that makes stock market transactions work smoothly and securely.
Common Terms to Know
Here are a few helpful terms often used when discussing clearing and settlement:
- Pay-in: When brokers submit cash or shares to the clearing corporation.
- Pay-out: When the clearing corporation releases cash or shares to the buyer/seller.
- Obligations: The amount of money or number of shares each party must deliver.
- Demat Account: Your electronic account to hold shares.
- Trading Account: Your account that is used to buy or sell shares.
Is the Clearing and Settlement Process the Same for All Trades?
- Intraday trades are squared off the same day, so there’s no actual settlement of shares.
- Delivery trades (where you hold the stock) go through the full clearing and settlement cycle.
- Futures & Options (F&O) have different settlement methods, usually cash-based.
- Mutual fund purchases are settled through separate systems like MFU and RTA platforms.
How Does Technology Help in Clearing and Settlement?
In India, the entire process is done electronically, thanks to SEBI’s strict regulations and advancements in fintech.
Benefits of this system:
- Quicker transactions
- Fewer errors
- Greater transparency
- Lower costs
With UPI and real-time payment systems coming into play, the process may become even faster and more seamless in the future.
Conclusion
The clearing and settlement process might sound complicated at first, but once you break it down, it’s not too different from any other transaction system—just a lot more secure and heavily regulated. It ensures that when you buy shares, you actually get them in your Demat account, and when you sell, you receive the money on time. So the next time you make a trade, you’ll know exactly what’s going on behind the scenes.
FAQs
What is the clearing and settlement process in the stock market?
It is the process that ensures buyers get their shares and sellers receive their money after a trade. Clearing verifies trade details, while settlement completes the exchange.
What does T+1 settlement mean?
T+1 means the trade is settled one working day after the transaction takes place. If you buy a stock on Monday, you’ll receive it in your Demat account on Tuesday.
Who is responsible for clearing and settlement in India?
Clearing corporations like NSCCL (for NSE) and ICCL (for BSE) manage the process. They ensure all trades are honoured safely and on time.
What happens if the seller doesn’t deliver the shares?
The clearing corporation steps in and completes the trade using its own resources. The seller is penalised, and the buyer receives the shares as planned.
Is there any risk in the settlement process?
There is very little risk, as clearing corporations guarantee the trades. The system is fully regulated by SEBI to protect investors.
Does the clearing and settlement process apply to intraday trading?
Intraday trades are squared off on the same day and don’t go through settlement. Only delivery-based trades follow the clearing and settlement process.
