Indian Stock Market Trading and Settlement Process

Indian Stock Market Trading and Settlement Process

When you buy or sell stocks in the market, your job ends with the transaction. However, there is a massive back-end process that goes on behind the scenes to enable your trade to go through smoothly. For example, the trade is only one part of the entire secondary market transaction. The other two back end processes of clearing and settlement are equally important.

What exactly is a trade?

A trade is either carried out in an offline mode or in online mode. The trader can execute via phone, laptop or mobile app. A trade occurs when the order placed by one party finds counterparty. There are millions of trades on the NSE in the cash market and the F&O market segments. Being an anonymous trading system, the buyer and seller do not know one another. The stock exchange uses an electronic order matching system to match ‘buy’ and ‘sell’ orders from different traders. That is how each trade is executed.

Clearing of the trades

The exchange clears the trades for all the transactions executed on the exchange for a particular day. Once the trade is executed, the next step is to clear the trade.  Clearing is a multi-level structure which includes the brokers, the clients, the clearing members, the exchange and the clearing corporation of the exchange. They jointly form the clearing matrix for the trades.

What exactly is clearing? Clearing is the identification of obligations. For example, if Client A has done an intraday trade and made a loss of Rs.50,000, that has to be paid to the exchange. If Client B has bought shares, then the client needs to ensure that the free funds for the purchase plus transaction costs are made available in the trading account. If Client C has sold the shares, then the client needs to ensure that they have clear delivery in the demat account. By T+1 day, the trader must either give DIS or have a POA given to the broker to debit the demat account.

Clearing process begins only after orders are matched and the trade is executed. Clearing is important because it enables the identification of what security is owed to the buyer and how much money is owed to the seller. The entire process is managed by ‘clearing houses’. Although, these clearing houses are affiliated to the stock exchanges, their management is totally independent to keep Chinese walls.

Clearing is a gross level activity. At the end of the day, your net obligations in money and shares will be determined to enable you to know how much has to paid or received and how much shares have to be delivered or received. Traders tend to conduct multiple transactions in any trading day. As a result, the clearing house identifies all the transactions and the net amount or net securities owed to the trader are calculated.

Finally, the settlement process

This is the last and final step in the trade. Once the net obligations are calculated in the clearing process, the next step is to ensure that these financial obligations are honoured. The fulfilment of the financial obligations identified in the clearing step is called as settlement of the trade. Once the trade is settled, the loop is completed. The buyer receives the shares and the seller receives the bank credit by the end of T+2 day. Once the buyer receives the security and the seller receives the payment, the transaction is settled.

Some important settlement types on the stock exchange

These are some of the popular settlement types on the NSE.

  • Normal segment (N)
  • Trade for trade Surveillance (W)
  • Retail Debt Market (D)
  • Limited Physical market (O)
  • Non cleared TT deals (Z)
  • Auction normal (A)

Trades in the settlement type N, W, D and A are settled in dematerialized mode. Trades under settlement type O are settled in physical form. Trades under settlement type Z are settled directly between the members and may be settled either in physical or dematerialized mode.

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Here’s All You Need to Know About Getting a Demat Account

Open Demat Account
by 5paisa Research Team 25/03/2020

Demat Account is almost like a bank account. Just like you hold funds in your bank account, you hold shares and other securities in the Demat Account. Having a Demat Account is mandatory for trading in equities as per SEBI regulations. 

How to open Demat Account?

Demat Account can be opened online or offline. It is normally opened along with trading account (TCD) by the broker. Demat Account can be opened with any authorised depository participant (DP); which could be a bank or a broker. Here is how to open a Demat Account.

For offline Demat Account, you need to fill up the demat form and sign the demat agreement and submit to your DP. Basic documents like PAN Card, Proof of identity, Proof of residence and cancelled cheque are required. Copies of self-attested documents must be submitted to the DP along with the signed DP agreement. Carry the originals for verification by the officer. Demat account opening can take up to 4-5 days, if all the documents are in place.

Online Demat Accounts can be opened by filling up the online form on the DP website. You must authenticate your identify and address with your Aadhar Card and verify the same with OTP sent to mobile. An in-person-verification (IPV) has to be done before fully activating the demat account. Only Aadhar address will be considered for online demat.

Check: Procedure to open a Demat account


How to use the Demat Account

With a demat account, your purchase, sale and holding of securities are in electronic mode. You must issue a signed Debit Instruction Slip (DIS) to sell shares or you can give a power of attorney (POA) to the broker. When you sell shares, the demat account gets debited and when you buy shares the demat account gets credited.  All corporate actions like bonuses and splits are automatically credited to your demat account. Dividends are directly credited to the mapped bank account. 

Documents Required for Demat Account

As stated earlier, demat account opening requires proof of identity and proof of address. Proof of identity can be any statutorily issued photo identity like passport, Aadhar, driving license, voter card etc. Proof of address can be any of the above with complete and latest address or electricity or land line bill. In case of online demat account opening, the Aadhar address will be considered. In addition, submission of PAN card and cancelled cheque are mandatory for opening demat account.

Importance of having a Demat account

Here are some of the key uses of having a demat account.

1. It facilitates non-physical holding of securities

2. Demat account can hold equities, bonds, ETFs, gold bonds and other securities

3. Corporate actions are automatically executed in demat account

4. One point intimation of change in address, email, mobile to all companies

5. Eliminates risk of physical holdings like bad delivery, mutilation of certificates, loss in transit, forgery, fake certificates etc.

6. Trading shares, holding in demat and bank transfers become one seamless chain if you opt for online trading

7. Demat is also cost effective compared to dealing in physical certificates

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5 Multi-bagger stocks for the next 5-years

multi bagger stocks
by Nikita Bhoota 07/04/2020

The Indian benchmark indices Nifty 50 and Sensex have plummeted 27.8% and 28% respectively from February 28, 2020 to April 03, 2020.  Rise in coronavirus cases in the country as well as at the global level and inability to find a vaccine to treat the epidemic has created panic all over the world.

As per the media reports, India has crossed the mark of 4,400 Covid19 cases. To curb the situation, the Government has announced a 21days lockdown due to which the economic activity and income of the people in the country are adversely affected. However, the Government has announced Rs.1.7lakh cr relief package to support the stressed pockets in the economy.

The investors are liquidating their market investments and ready to book losses in the fear that the market will fall further. However, investors from a long term point of view should act opposite, instead of selling their investments, they should accumulate the stocks with strong fundamentals and with attractive valuations.

Therefore, based on the positive outlook, future growth prospects, and management pedigree of the companies, we have selected the below 5 stocks that could be likely multi-baggers over the period of next 5-years. 

Quess Corp

We are positive on the stock on account of strong financial position, presence of strong promoter group and attractive valuations. The company has not seen any downsizing of temporary headcount by the clients due to spread of Covid 19. Not a single FTE (full-time equivalent) has so far been de-mobilised by clients. In general staffing, clients are retaining headcount in preparation for recovery, while IT staffing is benefitting from ramp-up at captives. The housekeeping business is steady. In staffing as well as FM, tri-partite agreements imply that Quess has on obligation to retain FTEs in the event of down-sizing by clients. However, the early closure of colleges will impact F&B revenues in the short run. We consider the recent correction in the stock to accumulate the stock for the long run. The stock is currently trading at 8.4x FY21EPS.

Year Net Sales (Rs Cr) OPM (%) PAT (Rs Cr) EPS (Rs) PE (x)
FY19 8,527 5.40% 256 17.3 12.7
FY20E 11,015 6.20% 115 7.8 28.2
FY21E 12,867 6.40% 388 26.2 8.4

Source: 5paisa Research

Tata Consumer Products

We are positive on the stock on account market share gains and new launches. Market share gains in India tea are mainly from regional and local players. The company commands 20% market share in tea segment in India.   Moreover, it will also benefit owing to the shift from unorganized to organized sales on the back of premiumisation, strong marketing campaigns (Jaago Re) and higher sales of new variants (Elaichi, Masala, Agni). The increasing trend of Specialty, herbal teas in international market (US, UK, Canada) will also drive future growth. Thus, we expect revenue CAGR of 6.8% over FY19-21E. We expect EBITDA CAGR of 18.5% over FY19-21E due to to favorable commodity prices and improvement in margin of coffee business. We expect PAT CAGR of 15.9% over FY19-21E. The stock is currently trading at 30.7x FY21EPS.

Year Revenue (Rs cr) OPM (%) Net Profit (Rs cr) EPS (Rs) PE (x)
FY19 7,251 10.8 408 6.5 41.3
FY20E 7,521 12.6 463 7.3 36.4
FY21E 8,269 13.3 548 8.7 30.7

source: 5paisa Research

Exide Industries

Exide Industries, a duopoly player, stands to benefit from auto replacement demand recovery, emerging opportunities (solar and e-rickshaws), cost control & minimal capex, and softer lead prices. However, the company will face short term challenges due to the temporary shutdown of manufacturing units and slowdown in the economy due to spread of Covid19. Thus, we see revenue CAGR of 5% over FY19-21E. We expect margins to improve by 120 bps in the same period on lower lead prices and better after market OEM revenue mix. We forecast 9% PAT CAGR over FY19-21E driven by healthy top-line growth (stable replacement demand + recovery in OEM volumes). The stock is currently trading at 10.8x FY21EPS.

Year Net Sales (Rs Cr) OPM (%) PAT (Rs Cr) EPS (Rs) PE (x)
FY19 10588 13.3 844 8.7 14.7
FY20E 10427 14 884 10.4 12.3
FY21E 11592 14.5 1008 11.9 10.8

Source: 5paisa Research

SBI Life Insurance (SBI Life)

SBI Life is India’s largest private life insurer, with an overall market share of 12.2% on a retail APE basis. The company has a product mix of participating, non-participating and linked policies, with the mix skewed towards linked products. Unlike peers, for which growth is largely driven by one or two product segments, SBI Life has delivered industry leading growth across protection, non-par annuity and guaranteed return products as well as ULIPs, defying the weak sentiment in the capital markets. We believe that it could continue to surprise the street positively via resilient growth in uncertain times driven by a strong distribution franchise and mass customer base. We expect 17.3%/25% EV/VNB CAGR over FY19-21E. The stock trades at 2x FY21E P/EV.

Year New Premuim Income (Rs Cr) VNB (Rs Cr) VNB margin (%) PAT (Rs Cr) EV per share P/EV (x)
FY19E 32,890 1,720 17.70% 1,326 224 2.7
FY20E 43,076 2,169 19.00% 1,659 262 2.3
FY21E 52,550 2,695 20.00% 2,102 308 2

Source: 5paisa Research

Deepak Nitrite (DNL)

We expect strong topline growth of 29.2% CAGR over FY19-21E driven by growth in the Basic Chemicals and the Fine & Specialty segments. Downstream derivatives of phenol and acetone should start contributing to growth from FY21E. The company continues to invest in R&D, and efforts are underway to launch new fine & specialty chemicals that are agrochemical and pharma intermediates. Further, Management expects DNL to benefit from the unfortunate outbreak of the novel coronavirus, which will likely accelerate the search for non-China suppliers. EBITDA margins are expected to improve 450 bps over FY19-21E due to continuous strength in basic chemicals, Fine and Specialty chemical segment and products business. We see PAT CAGR of 70.2% over FY19-21E. The stock is trades at 10.3x FY21E EPS.

Year Net Sales (Rs Cr) OPM (%) PAT(Rs Cr) EPS(Rs) PE(x)
FY19 2,699 15.3 173 12.7 29.9
FY20E 4,270 23 560 41.1 9.2
FY21E 4,505 19.8 501 36.7 10.3

Source: 5paisa Research

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Why divestment in LIC is important for Capital Market?

Why divestment in LIC is important for Capital Market?
by Prakarsh Gagdani 02/05/2020

While the Sensex witnessed a loss of 1000 points on the budget day, a flurry of discussion swirled up with the big bold announcement of the government’s decision on LIC of its size.

Impact of LIC Divestment on the Market

Being India’s largest financial institution, LIC can easily emerge as the country’s top listed company in terms of market valuation once listed on stock exchanges. It holds a market share of 76.28% in terms of the number of policies and 71% in terms of first-year premiums. With this IPO, the retail investors will get a new company to invest in, while mutual funds will have a new promising security option.

Currently, most of the mutual funds are invested into the top 10-15 stocks that generally make up for the majority of the market share and returns. For instance, the top 5 Nifty constituents, comprising 41% of Nifty, gave a phenomenal average return of 28% in the year 2019. On the other side, for the Nifty Mid Cap and Small Cap index, the returns were either flat or negative for the period.

Investments by retail that flow into Mutual funds predominantly come through the route of SIP, pension funds, and insurance. There you do not have the flexibility to hold the liquid money. This makes it mandatory for the funds to be invested in stocks. A good PSU in the capital market gives better investment options to mutual funds by creating a depth to the market. A good IPO is not only beneficial to the government but also to the market and the retail investor, as most of the PSU in the past have given decent returns.

Aggressive disinvestment should be undertaken to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in some CPSEs (Central Public Sector Enterprises). If we take a look at the previously divested CPSEs, it is observed that such moves unlock the potential of these enterprises to create wealth evinced by the improved performance after privatization. There is a clear turn around seen in the wealth generation of these entities. One such example is Bharat Petroleum Corporation Limited (BPCL). Approval for strategic disinvestment of the Government’s shareholding of 53.29% in BPCL led to an increase of around Rs33,000 Cr in the value of shareholders’ equity of BPCL when compared to Hindustan Petroleum Corporation Limited (HPCL). This translates into an unambiguous increase in the BPCL’s overall firm value, and thereby an increase in national wealth by the same amount. Apart from BPCL, Steel Authority of India Limited (SAIL), Bharat Heavy Electricals Limited (BHEL), Maruti and SBI are also a few other CPSEs that performed really well on being disinvested.

Listing of companies on stock exchanges will make LIC more transparent, accountable and efficient, while giving the opportunity to the retail investors to participate in the wealth so created. The government has set an ambitious divestment target of Rs 2.1 lakh Cr for FY21, of which it expects to generate Rs 70,000 from LIC IPO. This is the highest ever divestment target and is likely to attract foreign investment.

Currently, LIC is a 100% government owed entity,.and its market value of LIC is Rs 8-10 lakh Cr, so the diversification of even as much as 5% might come to Rs40,000 -50,000 Cr. This is a huge amount for retail investors to participate and might generate decent returns for investors for long term.

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Will Tax Deduction Really Help?

Will Tax Deduction Really Help?
by Prakarsh Gagdani 02/05/2020

With an idea to simplify the entire process of tax filing, budget 2020 has proposed the introduction of new tax slabs with reduced rates. With the new regime, a common tax-payer may not require any expert advise for tax filing. Though on the face of it is good to be simplified. But not everything that is simplified is good for a general tax-payer. Let me explain you how. 

With the new regime, you forfeit tax exemptions under Section 80C, Section 80D and even benefits under LTC, HRA, Tuition Fees and standard deduction. In a nutshell, 70 out of the 100 exemptions will go away. Only a handful of exemptions like the CPF, gratuity, VRS compensation, retrenchment allowance etc will remain. But you give up on the standard deduction of Rs.50,000 and you don’t get any benefit from life insurance premiums, tuition fees or ELSS investments if you opt for the new tax regime.

In the old regime, people falling in the lower income group (below Rs15 lakhs), were investing in instruments like term insurance, health insurance, ELSS related mutual funds, in the pretext of saving tax. Though the objective then was to save tax but unintentionally they were making a wise move that benefited them in the long run. But now with the new scheme, we might see a curb in these healthy investment habits.

While the people falling under lower income group will benefit with more cash in hand, which might be directed to investments in capital market, the higher income group (more than Rs15 lakh per annum) will not gain much benefits. It is this group that makes more investments in sections like 80C, 80D, HRA, and LTA with the surplus available but the removal of the exemptions, which leads to the increased taxable amount would clearly be a loss making proposition for a tax-payer.

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Covid 19: A pain for Summer Stocks

summer stocks
by Nikita Bhoota 12/05/2020

As the temperature begins to rise, the experts generally recommend investors to buy stocks of companies associated with air conditioners, cooling systems, consumer durables and tours & travel that normally see an uptrend between March and June. Some of the other categories that benefit from a harsh summer include makers of talcum powders, ice creams, juices, fruit and aerated beverages, deodorants etc.

However, this year the scenario seems to be opposite. The demand for consumer durable goods, ice creams and beverages are shattered. The spread of coronavirus (Covid19) disease all over the world and in India has resulted in shutting down the manufacturing activities in the country.  Also, the consumers of beverages and ice creams are recommended not to consume these products to curb the spread of Covid19. Similarly, the aviation and hotel industry are not allowed to carry on their operations. Thus, the market performance of stocks associated with manufacturing and services like consumer durables, beverages and tours and travels will be adversely affected.

Company Name

2-Mar-20

8-May-20

Gain/ Loss

Indian Hotel

133.6

67.5

-49.5%

Mahindra Holidays

214.1

125.8

-41.3%

Bluestar

809.4

478.2

-40.9%

Vadilal Industries

774.3

494.3

-36.2%

Varun Beverages

804.9

619.6

-23.0%

Voltas

663.2

456.6

-31.2%

Symphony

1,291.6

829.6

-35.8%

Emami

258.4

182.3

-29.4%

Pidilite

1,529.0

1,367.4

-10.6%

Source: BSE

Indian Hotel

Covid-19 outbreak and the control measures introduced by the Centre have resulted in a severe drop in foreign and domestic travel, across both the tourism and business traveller segments. As per the Media reports, the hotels’ sector witnessed a decline of more than 65% in occupancy levels in the third week of March 2020 as compared to the same period of the previous year. Indian Hotel is the major brand in hotel sector in India. The stock price have declined 49.5% from March 02, 2020 to May 08, 2020.

Mahindra Holidays

Mahindra Holidays has over 55 resorts in India and 52 internationally, with over 2.51 lakh members. Due to complete lockdown in the country, the business of the company will be highly impacted. The company had suspended the operations in most of the resorts for the time being till 31st March, 2020. The stock price has tumbled 41.3% from March 02, 2020 to May 08, 2020.

Bluestar

Blue Star stock slips 40.9% on halting operations due to the COVID-19 outbreak. Blue Star is an air-conditioning and commercial refrigeration company. The company conducts various activities, such as electrical, plumbing and fire-fighting services. Its segments include electro-mechanical projects and packaged air conditioning systems, and unitary products.

Vadilal industries (VIL)

A harsh summer bodes well for ice-cream makers like Vadilal. However, this year the spread of Covid 19 has affected the consumption and production activity of the company. VIL operates in two major segments – ice cream, under the brand name Vadilal and processed food, under brand name Quick Treat. Ice-cream brand Vadilal has a legacy of 100+ years. It has a strong presence in north, west and east India.

Varun Beverages

PepsiCo India's bottling partner stock was down 23% as the production and distribution facilities have been temporarily shut down and will be operated as per the local guidelines. Varun Beverages is one of the largest franchisees in the world (outside the USA) for PepsiCo. The company has operations across 17 states and two union territories in India. The manufacturing footprint is well spread out and includes 17 units in India and four production facilities in international markets. Products manufactured by Varun Beverages include carbonated soft drinks - Pepsi, Mountain Dew, Seven Up, Mirinda; non-carbonated beverages - Tropicana Slice, Tropicana Frutz; and bottled water - Aquafina.

Voltas

Voltas, a Tata Group company founded in 1954, has successfully evolved from a refrigeration and air-conditioning company into a fully-fledged mechanical, electrical and plumbing (MEP) contractor. The company’s key offerings include heating, ventilation, air-conditioning and refrigeration (HVAC&R) solutions, turnkey electromechanical projects (EMP), and room AC products. The stock plummeted 31.2% from March 02, 2020 to May 08, 2020 due to covid19 impact.

Symphony

The heatwave is likely to be more towards the central and northern parts of India as per the IMD, and Symphony could be a major gainer as it is more into the cooler segment than the air conditioner. It also has a very good brand recall. However, this summers will get impacted by lockdown in the country. The Symphony management has said consumer footfalls dropped sharply in March, as malls, modern retail formats and small dealers in small towns started shutting operations. Transport and inland logistics services are disrupted. Even the e-commerce platform has stopped delivering non-essentials. Symphony is the leading manufacturer of evaporative air coolers in India, with a value market share of ~50% in the organized market.

Emami

Emami’s April- June quarterly volume growth likely to get impacted this summer due to the spread of Covid19.  Summer portfolio sales for products like Navratna Cool Oil, Talc and HE deodorant which contribute about 25% to the total portfolio on annualised basis may be impacted. The Emami Group is one of India’s leading consumer-goods companies, with a presence in niche categories such as ‘cooling oils, pain balms and antiseptic creams, with no competition from MNCs so far. The company also markets men’s fairness creams and ayurvedic OTC medicines.

Pidilite

Pidilite has a product that needs to be applied to roof and walls so that the walls absorb heat.  The halt on construction, repairs and maintenance activity in the country will impact the financial numbers of the company. The company’s product range includes adhesives and sealants, construction and paint chemicals, automotive chemicals, art materials, industrial adhesives, industrial & textile resins, and organic pigments and preparations. Consumer products form nearly 80% of Pidilite’s sales consisting of adhesives, construction and plant chemicals and art materials. Pidilite shares are down 10.6% from March 02, 2020 to May 08, 2020.