Settlement cycle
Also written T+1 settlement · T+1 settlement cycle
The time window, fixed by the exchange, within which securities and funds for a trade must be delivered — T+1 in Indian secondary markets since 27 January 2023, meaning one trading day after the trade.
In plain language
When you buy shares on a stock exchange, you see the trade on your screen instantly. The shares do not arrive instantly. There is a scheduled gap between the trade and the settlement — the actual movement of shares to the buyer and money to the seller.
That gap is the settlement cycle. It is written as T+n, where T is the trade day and n is the number of days to settle.
Indian secondary market trades moved to T+1 from 27 January 2023. Buy on a Monday, and the shares are delivered through the depository system on Tuesday. SEBI's stated aims were operational efficiency, quicker fund remittance and share delivery, and easier trading for investors.
How it works
The workbook describes how a market trade — one done and settled through the exchange's mechanism — actually moves through the depository system:
- The exchange downloads to each broker its settlement positions: what it must deliver and receive.
- The seller instructs his DP, through a delivery instruction slip carrying the settlement number, to move the shares to the clearing member account of his broker.
- The broker transfers the shares to the clearing corporation by the pay-in date in the exchange's settlement schedule.
- The clearing corporation transfers them to the clearing member account of the buyer's broker on the pay-out day.
- The buyer's broker moves them to the buyer's beneficiary account — automatically if the buyer has given standing instructions to his DP, otherwise against a receipt instruction.
Because trades are anonymous, the clearing corporation stands between all trades; there is no direct transfer between buyer and seller. Members of the exchange must also be participants in the depository system.
Off-market trades sit outside this. They are done one-on-one, with no role for the exchange or its clearing corporation; the depository moves only the securities, and cash is settled outside it.
Why a registrar cares. Corporate-action entitlement is decided by the beneficial owner download as on the record date. A buyer is on that download only if his purchase has settled into his account by then — so the settlement cycle decides which side of a record date a trade falls.
A worked example
Illustrative dates, trading days only. A company fixes Friday as the record date for a dividend of Rs 11 per share.
| Buyer purchases on | Settles on (T+1) | On Friday's BO download? | Dividend on 500 shares |
|---|---|---|---|
| Wednesday | Thursday | Yes | 500 × Rs 11 = Rs 5,500 |
| Thursday | Friday | Yes | Rs 5,500 |
| Friday | Monday | No — the seller is | Nil to the buyer |
The seller in the Friday trade still holds the shares in his account at the end of the record date, so the Rs 5,500 goes to him even though he has already sold.
Now the mechanics for the Thursday trade. On Thursday evening the seller's broker receives its settlement obligation from the exchange. The seller's shares move to the broker's clearing member account and, by pay-in on Friday, to the clearing corporation. On pay-out the clearing corporation credits the buyer's broker, which credits the buyer's beneficiary account under his standing instruction — all within the one-day cycle.
Why NISM asks about it
Chapter 12.3 (Trading and Settlement) describes market and off-market trades, the pay-in and pay-out flow and the move to T+1; Chapter 14 (Secondary Market Transactions) returns to trading. Expect the T+1 date (27 January 2023), the role of the clearing corporation, and questions about standing instructions and delivery instructions.
Common exam traps
- T+1 is the secondary market settlement cycle. It is not the listing timeline for public issues, which is T+3 from issue closing date.
- The clearing corporation stands between buyer and seller — shares never move directly between them in a market trade.
- Off-market trades are outside the exchange's settlement cycle; cash is settled outside the depository.
- Credits need standing instructions or a receipt instruction; debits always need a delivery instruction from the account holder.
- The settlement number is required on a DIS for market trades; for off-market trades the receiver's DP ID and client ID are needed instead.
- Entitlement follows the settled holding on the record date, not the trade date.
Check yourself
1.According to the workbook, from which date have secondary market trades in India moved to the T+1 settlement cycle?
- a)1 April 2022
- b)1 October 2024
- c)27 January 2023
- d)5 June 2015
Show the answer
Answer: (c) 27 January 2023
"Secondary market trades in India, have moved into the T+1 (Trade + 1) settlement cycle from 27 January 2023. SEBI has implemented this new cycle to bring operational efficiency, quicker fund remittances, share delivery, and easy trading for stock market investors."
The other dates come from elsewhere in the chapter:
Option B, 1 October 2024, is when SEBI's shorter bonus-share timeline took effect — "effective from October 1, 2024".
Option D, 5 June 2015, is the date of SEBI circular CIR/MRD/DP/10/2015, which set up the distinctive number database.
Option A is not a date the workbook gives for the settlement cycle.
2.In a market trade, how do securities move from the seller to the buyer?
- a)Directly from the seller's account to the buyer's account
- b)From the seller to his broker's clearing member account, then to the clearing corporation by the pay-in date, then to the buying broker's clearing member account on pay-out day, then to the buyer's beneficiary account
- c)Through the R&T agent, who updates the register of members for each trade
- d)Through SEBI's settlement system
Show the answer
Answer: (b) From the seller to his broker's clearing member account, then to the clearing corporation by the pay-in date, then to the buying broker's clearing member account on pay-out day, then to the buyer's beneficiary account
Since the trades done on a stock exchange are anonymous, the clearing corporation of the exchange stands between all trades. There is no direct transfer of shares between the buyer and the seller.
Which disposes of option A — the very anonymity of exchange trading makes a direct transfer impossible.
The four movements: the seller gives instructions to his DP to move securities to the clearing member account of the broker. The broker will in turn transfer the securities to the clearing corporation by the pay-in date specified in the settlement schedule of the exchange. The clearing corporation will transfer the securities to the clearing member account id of the receiving broker, i.e. the broker through whom the buyer bought the shares, on the pay-out day. The buyer's broker will give instructions to transfer the securities to the beneficiary account of the buyer.
Pay-in and pay-out are the two hinges.
The last step still needs the buyer's authority: either the buyer should have given standing instructions to his DP to receive all credits to his beneficiary account or give receipt instruction for every credit that is expected.
Option C misplaces the R&T agent. Demat holdings move without it — an investor holding dematerialised shares can conduct transactions such as transfer of shares without having to resort to the Issuer/ R&T agent.
Option D names the regulator, which operates no settlement system.
Everyone in the chain must belong to both systems: market trades are done through members of the stock exchange who are required to be participants in the depository system also.
And the whole chain runs to a clock — the settlement cycle, specified by the exchange, now T+1... from 27 January 2023, brought in to bring operational efficiency, quicker fund remittances, share delivery, and easy trading.
3.Who downloads to each broker the details of its settlement positions — its obligations to deliver and receive shares?
- a)The depository
- b)The exchange
- c)The R&T Agent of each company traded
- d)The broker's own DP
Show the answer
Answer: (b) The exchange
"The transfer of securities for trades done on an exchange has to be within the time cycle, called the settlement cycle, specified by the exchange. The details of the settlement positions of each trading member in terms of obligation for delivery and receipt of shares are downloaded by the exchange to each broker."
Option A is wrong — the depository moves the securities, but the obligations come from the exchange that matched the trades.
Option C is wrong — trades in demat shares happen "without having to resort to the Issuer/ R&T agent".
Option D is wrong — the DP acts on instructions; it does not calculate settlement obligations. Note also that "Market trades are done through members of the stock exchange who are required to be participants in the depository system also."
Where this is taught
Free preparation for NISM Series II-ARelated terms
- Record dateThe date on which a company looks at its register and decides who gets the bonus, dividend, rights or split — you must be holding the shares in your demat account at the end of that day.
- 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.
- Beneficial ownerThe investor who owns dematerialised securities for every practical purpose — the depository is the registered owner on the company's books, but the dividends, bonus, rights and votes are the investor's.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Secondary marketThe market where securities already issued are traded between investors — the money goes to the selling investor, not to the company, and the issuer's capital is unchanged.
- SettlementThe step where the obligations computed by clearing are actually discharged — commodities against funds on a delivery-versus-payment basis, or cash against the settlement price.
- Straight Through ProcessingElectronic processing of a trade in one pass from deal to final settlement through a single system, without manual re-entry; mandatory for institutional trades since 2004.
- Settlement numberA unique identifier tagging a trade or batch of trades to a particular settlement cycle and date, used by brokers, clearing corporations and depositories to match and reconcile obligations.
- 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.