Pay-out
The 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.
In plain language
Pay-out is the reverse of pay-in. Once everyone who owes funds and shares has paid them in, the clearing corporation releases them to the members who are due to receive.
Funds go back through the clearing bank: the clearing corporation instructs the bank to debit its account and credit the receiving member's clearing account. Securities go through the depository. The big recent change is where they land. They used to go to the buying broker's pool account, and the broker then passed them on to the client. Now the clearing corporation credits them directly to the client's own demat account.
That change removes a day in which a buyer's shares sat in the broker's account, which is exactly the window in which client securities could be misused.
How it works
Under the T+1 cash market schedule in the workbook, funds pay-out is by 1:30 p.m. and securities pay-out is by 3:30 p.m. on T+1.
Direct pay-out. By SEBI circular dated June 5, 2024, pay-out of securities is credited directly to the client's demat account by the clearing corporations. Because of this, the securities pay-out time moved from 1:30 p.m. to 3:30 p.m., and the shares reach the client on the settlement day itself instead of one working day after the broker receives the pay-out. Direct pay-out does not apply to clients settling through SEBI-registered custodians.
Unpaid securities. If a client has not paid in full for a non-MTF purchase, the shares still go to the client's demat account, but with an auto-pledge marked "unpaid" in favour of the broker's Client Unpaid Securities Pledgee Account (CUSPA).
Funds to the client. Unless the client has authorised a running account, the broker must settle funds within one working day (24 hours) of the pay-out.
Holidays. Where settlements queue up, clearing corporations settle sequentially, and the pay-out of the first settlement is made available for the member's pay-in in the next.
A worked example
Kavita sells 200 shares of a company at Rs 1,500 on Monday (T). Her sale value is 200 x Rs 1,500 = Rs 3,00,000 (charges ignored). Arjun, a client of another broker, buys 200 shares the same day.
| When | What happens |
|---|---|
| Monday (T) | Trades execute; Kavita's shares are blocked for pay-in |
| Tuesday (T+1), by 11:00 a.m. | Pay-in: Kavita's shares and Arjun's broker's funds reach the clearing corporation |
| Tuesday, by 1:30 p.m. | Funds pay-out: Rs 3,00,000 credited to Kavita's broker's clearing account |
| Tuesday, by 3:30 p.m. | Securities pay-out: 200 shares credited directly to Arjun's demat account |
| By Wednesday | Kavita's broker must pass Rs 3,00,000 to her, unless she has a running account |
Before direct pay-out, Arjun's shares would first have landed in his broker's pool account and reached him a working day later. (Names and prices are illustrative; the timings are the workbook's.)
Why NISM asks about it
Chapter 5 (sections 5.5 and 5.6) sets out the pay-out legs and SEBI's direct pay-out of securities, and Chapter 6 (section 6.1's activity schedule and section 6.4 on settlement of securities) gives the timings and the June 5, 2024 change. Chapter 4 (section 4.2.2) covers the auto-pledge of unpaid securities that now happens at pay-out. Expect questions on the 1:30 p.m. and 3:30 p.m. timings, on who receives securities pay-out, and on the custodian exception.
Common exam traps
- Securities pay-out now goes to the client's demat account, not the broker's pool account. Older descriptions in Chapter 5 (section 5.5) still describe the pool-account route; the workbook itself flags the June 5, 2024 change beside them, so answer with direct pay-out.
- Securities pay-out time is 3:30 p.m., not 1:30 p.m. 1:30 p.m. is the funds pay-out.
- Custodial clients are excluded from direct pay-out.
- Unpaid shares are not withheld from the client's account. They are credited and then auto-pledged to CUSPA.
- Funds to the client within one working day of pay-out is the default; a running account is the exception, and only for funds.
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.Under the T+1 settlement schedule, pay-out of funds and pay-out of securities take place respectively:
- a)By 11:00 am and by 1:30 pm
- b)By 1:30 pm and by 3:30 pm
- c)By 3:30 pm and by 1:30 pm
- d)Both by 1:30 pm
Show the answer
Answer: (b) By 1:30 pm and by 3:30 pm
By 1.30 pm — Pay-out of funds. By 3.30 pm — Pay-out of Securities.
The securities timing changed recently, and the reason is the direct pay-out reform: SEBI vide circular dated June 5, 2024 has mandated that the pay-out of securities be credited directly to the client account by the Clearing Corporations. As a consequence of the above, the timing of the payout of securities shall be revised from 1:30 PM to 3:30 PM.
The benefit: as a result of Direct Payout, the securities shall be credited to the clients' demat account on the same settlement day instead of one working day from the receipt of pay-out from the Clearing Corporation.
The rest of the T+1 schedule: by 7:30 AM completion of custodial confirmation · by 9:00 AM download of obligation files · up to 11:00 am pay-in of securities and funds, and valuation debit in case of non-delivery of securities · T+1 auction session · T+2 auction pay-in and pay-out, generally by 8:00 am.
The carve-out: the securities direct pay-out shall not be applicable to clients having arrangements with custodians registered with SEBI.
3.Which statement about a clearing member's settlement pool account is correct?
- a)The clearing member holds ownership and beneficiary rights over the shares in it
- b)The clearing member does not get any ownership or beneficiary rights over the shares held in it
- c)It must be opened with only one depository
- d)Clients cannot transfer shares directly into it
Show the answer
Answer: (b) The clearing member does not get any ownership or beneficiary rights over the shares held in it
It should be noted that unlike the usual demat accounts, the clearing member does not get any ownership or beneficiary rights over the shares held in these accounts. The benefits related to shares are received in the pool account, from where they are distributed to the beneficiaries.
Option C is wrong: it is mandatory for clearing members to open demat accounts with both the depositories, i.e., the Central Depository Services Limited (CDSL) and the National Securities Depositories Limited (NSDL) through depository participant.
Option D is wrong: client can transfer share directly in members pool account.
What the account is for: a pool account is a settlement account of broker/exchange member from where broker deliver securities to exchange's clearing corporation against pay-in obligation and receive pay-out of securities from clearing corporation.
Note that the pay-out leg has changed. SEBI vide circular dated June 05, 2024 has decided the securities for pay-out shall be credited directly to the respective client's demat account by the CCs, except for clients having arrangements with custodians registered with SEBI.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Auto-pledgeThe automatic creation of a pledge over a client's funded stock in favour of the "Client Securities under Margin Funding Account," without needing a specific pledge instruction from the client.
- 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-inThe 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.
- Running accountA client's written, revocable authorisation letting the broker keep the client's funds instead of paying them out within one working day of pay-out, subject to settlement at least every 30 or 90 days.
- Client Unpaid Securities Pledgee AccountA separate account a TM/CM opens, in whose favour an auto-pledge marked "unpaid" is created when pay-out securities go to a client who has not paid for them.
- 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.
- 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.
- 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.