Off-market transaction
Also written Off-market trade · Off-market transfer
A transfer of securities between two demat accounts on terms agreed between the parties, settled directly through the depository without a clearing member or clearing corporation.
In plain language
Most shares change hands on a stock exchange. There, a clearing corporation stands between the buyer and the seller. An off-market transaction skips that step. The two parties agree the terms between themselves. The seller then tells his DP to move the securities into the buyer's demat account.
The depository only moves the securities. The money changes hands outside the depository system, on whatever terms the two parties agreed. There is no exchange guarantee. There is no netting either, so each trade settles on its own.
A single off-market instruction can move a client's whole holding. That is why it is one of the most closely guarded steps in the depository system. It needs an OTP confirmation and beneficiaries registered in advance. The consideration details, meaning what was paid, must also be given.
How it works
From Chapter 8 (section 8.2) of the workbook:
What counts as off-market. Any trade cleared and settled without the participation of a clearing member or clearing corporation - a transfer from one beneficiary account to another due to a trade between them. Large deals between institutions, trades among private parties, transfers between a client and a sub-broker and large debt trades are normally settled this way.
The seller's side.
- Submits a DIS with "off-market trade" ticked and an execution date; the debit happens on that date.
- The DP enters it and the system generates an instruction ID, which the DP writes on the slip.
- If the balance is short, the instruction waits till the end of the execution day. NSDL debits as soon as balance arrives; CDSL checks at predefined intervals. If balance never arrives that day, the instruction fails in both.
The buyer's side. Credit is automatic if standing instructions were given; otherwise a Receipt Instruction is needed for every expected receipt.
Safeguards.
- Consideration details are mandatory for reason "off market sale/purchase": mode of payment, bank account, date, bank, branch, transferee name, cheque/reference number - with evidence.
- OTP consent from the source client for all off-market transfers (including inter-depository) with execution date from November 1, 2020; unconfirmed instructions are rejected at end of execution date. OTP is waived only for reason code "Implementation of Government / Regulatory Direction / Orders".
- Beneficiary registration: the buyer's account must first be added and OTP-verified as a beneficiary under the seller's account, for all off-market reason codes.
- Since April 01, 2019, transfer of physical shares needs prior dematerialisation, and all off-market transfers need a physical DIS signed by the client or an electronic DIS.
Stamp duty is collected on the consideration amount before execution (Chapter 8, section 8.3).
A worked example
Illustrative figures; the process is the workbook's.
Rakesh agrees to sell 2,000 shares of an unlisted company to his cousin Pooja for Rs 150 per share, a consideration of 2,000 x Rs 150 = Rs 3,00,000. Both have demat accounts, with different DPs.
| Step | Who | What |
|---|---|---|
| 1 | Rakesh | Registers Pooja's demat account as a beneficiary in his account, verified by OTP |
| 2 | Pooja | Pays Rs 3,00,000 by NEFT - outside the depository |
| 3 | Rakesh | Submits DIS: "off-market", reason "sale/purchase", execution date 12 June, consideration Rs 3,00,000 with NEFT reference, Pooja's bank details |
| 4 | Rakesh's DP | Enters the DIS; system generates an instruction ID |
| 5 | 12 June | Link/OTP sent to Rakesh's registered mobile/email; he confirms |
| 6 | Depository | Stamp duty collected on Rs 3,00,000; 2,000 shares debited from Rakesh |
| 7 | Pooja's DP | Credit is automatic if Pooja has standing instructions; else she must have given a receipt instruction |
What if Rakesh had only 1,500 shares on 12 June? The instruction waits. If he receives 500 more shares before end of day, it executes; if not, it fails, and a fresh instruction is needed.
Why NISM asks about it
Chapter 8 (Functions of DP - Trading and Settlement, 13% weightage, the heaviest chapter) opens with off-market settlement in section 8.2, and its first review question is "Transfer due to a transaction done on a person to person basis is called ___ transaction" (off-market). Its second tests the waiting rule for inadequate balance. Chapter 4 adds that consolidating multiple demat accounts is done by off-market transfer, and Chapter 7 covers the April 2019 demat-before-transfer rule.
Common exam traps
- Off-market means no clearing member or clearing corporation - not "outside market hours".
- Funds never move through the depository in an off-market deal.
- Insufficient balance: the instruction waits till end of the execution day, then fails. It does not carry forward to the next day.
- OTP is required for all off-market transfers, including inter-depository, except the government/regulatory-direction reason code.
- The buyer must be a registered beneficiary of the seller's account - for every reason code.
- Consideration details are mandatory for "off market sale/purchase", and stamp duty is computed on them.
- Receipt Instruction is needed only if no standing instruction exists.
Check yourself
1.Transfer due to a transaction done on a person-to-person basis is called a ________ transaction.
- a)Market
- b)Off-market
- c)Sub-market
- d)Intra-market
Show the answer
Answer: (b) Off-market
An off-market transaction is one between two accounts on mutually agreeable terms, done on a person-to-person basis, without going through the stock exchange mechanism.
The defining test is participation: any trade that is cleared and settled without the participation of a clearing member or clearing corporation is an off-market trade.
A market transaction is the opposite — it settles through the participation of a Clearing Corporation or Clearing House. "Sub-market" and "intra-market" are not terms used in the depository system at all.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Delivery Instruction SlipThe signed form on which a beneficial owner instructs the DP to debit the demat account — no beneficiary account can be debited without one, whether the transfer is on-market or off-market.
- Standing instructionA one-time authority, usually given at account opening, for the DP to credit securities into the account without a fresh instruction each time — the alternative is a Receipt Instruction for every single receipt.
- Consideration AmountThe value of an off-market transfer or pledge invocation captured in the depository system from the transferor's DIS, on which stamp duty is calculated and collected before the transfer executes.
- Inter-depository transferA transfer of securities from an account in one depository (NSDL or CDSL) to an account in the other, possible because SEBI regulations require the two depositories to be inter-connected.
- Market transactionSettlement of a trade executed on a stock exchange, moving through a Clearing Corporation/House and the seller's and buyer's clearing member accounts — as opposed to an off-market transaction settled person-to-person.
- Execution dateThe date on which a depository instruction is to take effect: a DIS debit waits till the end of that day for balance and then fails; for allotments and corporate actions, the day credits are made.
- Instruction IDThe unique number the DP system generates for each off-market delivery instruction it enters, which the DP writes on the instruction slip for future reference.
- Receipt InstructionThe form a transferee submits to its own DP to accept one specific incoming credit into its demat account, needed only when no blanket Standing Instruction is already on file.
- TransferThe legal change of ownership of a security in the issuer's records — a step that, before depositories, needed endorsement, a transfer instrument and stamp duty, and today happens by book entry alone.