Pay-in
The leg of settlement in which clearing members hand over what they owe: funds into the clearing corporation through the clearing bank, and securities into its pool account through the depository.
In plain language
After netting, every clearing member knows what it owes. Pay-in is the moment it actually hands that over.
There are two pay-ins, and they run through different pipes. Funds move through the clearing bank: the clearing corporation tells the bank to debit the member's clearing account and credit its own. Securities move through the depository: the clearing corporation tells NSDL or CDSL to debit the member's pool account and credit the clearing corporation's settlement pool account.
Only after pay-in is complete can the clearing corporation release the pay-out to the members who are owed. That is why a late or short pay-in is treated seriously.
How it works
In the T+1 rolling settlement cash market, the workbook's activity schedule runs:
| Time | Activity |
|---|---|
| T+1, by 7:30 a.m. | Custodial confirmation of trades |
| T+1, by 9:00 a.m. | Final obligations downloaded to brokers and custodians |
| T+1, up to 11:00 a.m. | Pay-in of securities and funds; valuation debit for non-delivery |
| T+1, by 1:30 p.m. | Pay-out of funds |
| T+1, by 3:30 p.m. | Pay-out of securities |
On the client side, the seller's shares reach the pool account through a delivery instruction, a DDPI or a valid PoA, and early pay-in now uses the block mechanism, which is mandatory for all early pay-in transactions. Before moving shares for pay-in, depositories validate each instruction against the client-wise net delivery obligation sent by the clearing corporation.
For derivatives, the daily MTM, premium and cash-settled final settlement pay-ins happen before market hours on the next day, around 8:30 a.m. Under optional T+0, securities pay-in can only be by early pay-in through the block mechanism, and non-custodial funds pay-in is around 1:45 p.m.
A worked example
A clearing member's net funds pay-in obligation for Tuesday's settlement is Rs 3.40 crore. By the pay-in deadline only Rs 3.20 crore is in its clearing account, leaving a shortfall of Rs 20 lakh.
The workbook says the exchange or clearing corporation may levy penal interest of not less than 0.07 per cent per day on a pay-in shortage. At that minimum rate:
Rs 20,00,000 x 0.07% = Rs 1,400 for each day the shortage remains.
The penal interest is the smaller problem. If the shortfall exceeds the amount SEBI or the clearing corporation specifies, or if shortages recur, the member's trading facility is withdrawn and its securities pay-out is withheld. If the money never arrives, the clearing corporation may close out securities in the normal or auction market.
A securities shortfall works differently: the member is debited a valuation debit for the undelivered shares, which is treated as a funds shortage, and the shares are bought in at auction. (The Rs 3.40 crore figures are illustrative; the 0.07 per cent floor is the workbook's.)
Why NISM asks about it
Pay-in runs through Chapter 3 (the T+1 settlement table in section 3.4.3), Chapter 5 (sections 5.3 on clearing banks and 5.6 on the clearing process, including block mechanism and pay-in validation) and Chapter 6 (the activity schedule in 6.1, funds shortages in 6.3.4 and securities settlement in 6.4). The paper tests the timeline (what happens by 7:30, 9:00 and 11:00 a.m.), the route (bank for funds, depository for securities) and the consequences of a shortage.
Common exam traps
- Funds pay-in goes through the clearing bank; securities pay-in goes through the depository. Swapping them is a standard distractor.
- Pay-in precedes pay-out. In the T+1 schedule pay-in ends around 11:00 a.m.; funds pay-out follows at 1:30 p.m. and securities pay-out at 3:30 p.m.
- The 0.07 per cent per day is a floor ("not less than"), not a fixed rate.
- A securities shortage becomes a funds matter. The valuation debit is added to the member's funds obligation.
- Block mechanism is compulsory for early pay-in, but does not apply to clients settling through SEBI-registered custodians.
- Obligations under T+1 and T+0 are not netted against each other at pay-in.
Check yourself
1.The process by which the clearing corporation acts as central counterparty and provides a financial guarantee for all transactions executed on the exchange is called:
- a)Indemnification
- b)Novation
- c)Netting
- d)Reconciliation
Show the answer
Answer: (b) Novation
The Clearing Corporation acts as a central counterparty i.e., it provides financial guarantee for all transactions executed on the Exchange. This process is called novation.
It is what allows anonymous trading to work at all — buyers and sellers who have never met can transact because each is dealing with the clearing corporation rather than with each other.
A Clearing Corporation performs three main functions, namely: clearing and settlement of all transactions executed in the stock market (i.e., completes the process of receiving and delivering shares/funds to the buyers and sellers in the market) and carrying out risk management.
The two phases of settlement are named separately: Pay-In is a process whereby a Clearing Member and Custodian (in case of Institutional deals) bring in money and/or securities to the Clearing House/Corporation. This forms the first phase of the settlement activity. Pay-Out is a process where the Clearing House/Corporation pays money or delivers securities to the Clearing Member and Custodians. This is the second phase.
2.The penal interest that the Exchange or Clearing Corporation may levy on a member's funds pay-in shortage is:
- a)Not less than 0.07 percent per day
- b)Not less than 0.7 percent per day
- c)A flat 15 percent per annum
- d)Not less than 1 percent per month
Show the answer
Answer: (a) Not less than 0.07 percent per day
The Exchange/Clearing Corporation may levy a penal interest of not less than 0.07 percent per day on the pay-in shortage of the member.
On an annualised basis that is roughly 25%, which is why it is set as a daily rate — the point is to make even a one-day shortfall expensive.
Beyond the interest, the consequences escalate: members failing to fulfil their funds obligations (including STT/Stamp duty obligation and Capital Cushion requirement) by the scheduled date and time to Clearing Corporation shall render him liable for withdrawal of trading facility or such other actions including disciplinary actions.
In case of pay-in shortfall, the trading facility of the trading member shall be withdrawn, and the securities pay-out would be withheld if the shortfall is in excess of the amount specified by SEBI or the Clearing Corporation from time to time, or there are recurring fund shortages by the member within a certain period and for a certain amount.
And ultimately: if the funds are not brought in at any time by the funds defaulting member, the Clearing Corporation, at its discretion, will proceed to close out securities in the normal/auction market.
3.A pay-in instruction is received for a quantity MORE than the client-wise obligation provided by the CC, with all other details matching. What do the depositories do?
- a)Reject the instruction entirely
- b)Process it in full
- c)Partially process it, up to the matching obligation quantity
- d)Refer it to the clearing corporation for approval
Show the answer
Answer: (c) Partially process it, up to the matching obligation quantity
If the quantity in instruction is more than the obligation provided by CC, then the instruction will be partially processed by the depositories (i.e., upto the matching obligation quantity).
This is a client-protection rule. Its purpose is stated at the outset: in order to further mitigate the risk for clients' securities, particularly those given towards delivery/settlement obligations, instructions for pay-in of securities from client demat account to TM pool account against obligations received from the CCs shall be validated. A broker cannot pull out more than the client actually owes.
The other outcomes:
Quantity less than obligation — the instruction will be carried out by the depositories.
All details matching — the instruction shall be carried out by the Depositories and such securities will be debited from client's demat account and credited to linked TM Pool account on or before the settlement day.
Discrepancies in details like UCC, TM ID, CM ID, ISIN etc. — such transfer instructions will be rejected by the depositories. So rejection is reserved for identity mismatches, not quantity mismatches.
And the carve-out: this process shall not be applicable to clients having arrangements with custodians registered with SEBI for clearing and settlement of trades.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Block mechanismBlocking of shares in a selling client's own demat account in favour of the clearing corporation, instead of moving them out, to give early pay-in benefit; mandatory for early pay-in since 14 November 2022.
- Buy-in auctionThe auction a clearing corporation runs through the exchange system on settlement day to buy shares a selling member failed to deliver, so the buying member still receives them.
- Clearing bankA bank empanelled by the clearing corporation, where every clearing member keeps a dedicated clearing account through which all funds pay-in, pay-out, margin and collateral movements are made.
- Multilateral nettingThe clearing corporation's method of collapsing every trade a clearing member did in a settlement into one net figure per security and one net funds figure, so each member either pays in or receives a pay-out.
- Pay-outThe leg of settlement in which the clearing corporation releases what members are owed: funds credited to their clearing bank accounts, and securities now credited directly to the client's demat account.
- Valuation debitThe amount a member is debited when it fails to deliver securities on pay-in day, equal to the shortfall quantity valued at a valuation price fixed by the clearing corporation.
- Early pay inDelivering securities to the clearing corporation's early pay-in account ahead of the pay-in deadline, mainly to earn margin exemption; now usually done by blocking shares in the client's own demat account.
- T+2 rolling settlementThe settlement cycle the booklets teach: trades on day T are settled two working days later, so a Monday trade settles on Wednesday. India has since moved to T+1.
- NovationThe clearing corporation stepping into the middle of every trade — becoming the buyer to every seller and the seller to every buyer — so that neither side carries the other's default risk.
- Close outSettling an undelivered sale in cash instead of shares: the defaulting seller is charged at a penal close-out price, used when an auction finds no sellers or is not held at all.
- Demat Debit and Pledge InstructionA limited, optional authorisation letting the broker (or broker-DP) debit a client's demat account only for settlement delivery, margin pledges, exchange MF orders and open-offer tenders - in place of a PoA.
- Netted obligationA settlement method in which all of a member's purchase and sale transactions in a security are netted into one pay-in or pay-out figure, rather than settled trade by trade.
- Bad deliverySecurities that are delivered for settlement but rejected by the depository for technical reasons such as incorrect signatures, names or details — treated like a short delivery and closed out through auction.
- Short deliveryA member's failure to pay in securities, fully or partly, on the settlement day — closed out at the shares' last closing price and made good by the clearing corporation through an auction.