T+2 rolling settlement

When you buy shares, you do not get them at the moment of the trade, and when you sell, the money does not arrive at once. The exchange first works out who owes what, and then everyone settles.

T is the trade day. T+2 means settlement happens two working days after it. Rolling means every trading day has its own settlement, one after another, like a line of buses leaving one by one rather than waiting to leave together at the end of the week.

Stale figure: the booklets describe T+2. Indian exchanges have since moved in phases to T+1, completed for all listed scrips in January 2023, with an optional same-day T+0 for some scrips from 2024. For this examination, answer T+2 as the booklets state it.

From both booklets:

• Settlement is on a T+2 rolling basis, with effect from April 1, 2003, where T is the trade day.
• Trades executed on a Monday are typically settled on the following Wednesday, counting 2 working days.
• Pay-in and pay-out of funds and securities are carried out on T+2.
• Trading happens on all days except Saturdays, Sundays and exchange holidays.

What you have to do: for a purchase, pay the broker's bank account before the pay-in day; for a sale, deliver the shares to the broker's demat account before the pay-in day. After pay-out, the broker credits shares (for a buy) or funds (for a sale) to you. Exchanges must ensure the broker completes pay-out to the client within 24 hours of the pay-out.

A difference between the two booklets: the Financial Education Booklet (Chapter 5) defines pay-in as brokers paying funds or delivering securities to the stock exchange, and pay-out as the stock exchange paying the broker. The securities-market booklet says the same flows go to and from the clearing corporation of the exchange. The clearing corporation is the body that guarantees settlement, so the second is the more precise description; an exam option naming either the exchange or its clearing corporation should be read in that light.

Amounts and dates are illustrative. Working days only; no holidays in the week.

Divya, a chartered accountant in Chandigarh, buys 40 shares at Rs 2,050 on Monday. Trade value: 40 × Rs 2,050 = Rs 82,000.

• Monday (T): order executed; contract note received.
• She transfers Rs 82,000 to her broker's bank account the same day, before the pay-in day.
• Wednesday (T+2): pay-in and pay-out take place.
• Her broker must credit the shares to her demat account within 24 hours of the pay-out, so by Thursday at the latest.

Her brother sells 100 shares on Friday. Counting two working days and skipping the weekend, T+2 is the following Tuesday. He must move the shares to the broker's demat account before pay-in; the sale money reaches his bank after pay-out.

If Divya had not paid in time, the securities-market booklet warns that insufficient funds for settlement may lead to a penalty and further losses.

Chapter 5 (Investment in Securities Market) covers trading days, pay-in and pay-out and the T+2 cycle, and both booklets use the Monday-to-Wednesday example. Expect a question that gives a trade day and asks for the settlement day, a question on the April 1, 2003 start date, and one on the 24-hour pay-out to clients.

• Count working days. A Friday trade settles on Tuesday under T+2, not Sunday.
• Answer T+2 for this exam, even though the market now settles on T+1.
• T+2 has applied since April 1, 2003 in the booklets.
• Pay-in comes from brokers; pay-out goes to brokers. Then the broker credits the client within 24 hours of pay-out.
• Exchange or clearing corporation? The two booklets name different counterparties for pay-in and pay-out; the clearing corporation is the one that guarantees settlement.
• Pay before pay-in day, not on it, if you want to be safe.