11.1 What is the clearing and settlement process
Nirav: Vedant, I clicked “Buy” on a stock yesterday and saw it in my portfolio today. It felt instant—how does that work so fast?
Vedant: It feels instant, but there’s a whole system running quietly behind the scenes. The trade has to be cleared and settled properly.
Nirav: You mean like paperwork?
Vedant: Not anymore! Today, it’s digital and follows something called a T+1 cycle—your trade gets settled the very next working day. Behind that smooth process are clearing corporations and depositories making sure money and shares move safely.
Nirav: So even though it looks quick on my app, there’s a well-managed process ensuring I get my shares and the seller gets their money?
Vedant: Exactly. Think of it like a backstage crew making sure your trading show runs smoothly even if you don’t see them, they’re essential.
So,
Suppose you’re ordering groceries online. You click “Buy Now,” and it feels instant—but behind the scenes, your payment goes through a payment gateway, the store checks inventory, packs the order, and the delivery partner picks it up. By the next day, the groceries arrive at your door. That smooth experience is possible because each party did its job invisibly and efficiently.
Similarly, in share trading, when you buy stocks, it looks instant—but clearing houses, brokers, and depositories quietly work together to transfer money and shares correctly by the next day (T+1), just like how your groceries get delivered after a coordinated backend process.
The clearing and settlement process in the share market is the quiet force that transforms a trade on your screen into a legitimate transfer of ownership. When you click “buy” or “sell” on your trading app, you might feel like it happens instantly—but behind that simplicity lies a well-oiled, tightly regulated system that ensures money moves in one direction and stocks in the other, without errors or fraud. It’s this process that allows millions of investors to transact daily with confidence.
The Indian share market follows a T+1 rolling settlement cycle, meaning trades are settled one working day after the transaction date. This accelerated timeline has increased efficiency and liquidity, giving investors quicker access to both securities and funds. Clearing corporations like NSCCL (for NSE) and ICCL (for BSE) are pivotal in managing this timeline by acting as intermediaries who ensure that both parties in a trade meet their obligations.
The process begins once a trade is executed. Trade information is transferred to the clearing corporation, which identifies the obligations of each party—how much cash the buyer owes and how many shares the seller must deliver. The clearing house also manages risk by collecting margins and ensuring that defaults don’t ripple through the system. All this happens with automation and strict regulatory oversight.
Settlement refers to the actual transfer of securities from seller to buyer and funds from buyer to seller. This is executed via depositories like NSDL and CDSL, which maintain investor demat accounts. On settlement day, securities are credited and debited electronically. What makes the Indian system robust is the use of netting—where only net obligations are settled, reducing transaction volumes and increasing efficiency.
In essence, the clearing and settlement system functions like a vigilant backstage crew at a theatre. While the audience enjoys the performance (i.e., trading), the crew ensures the lights stay on, the props are in place, and the transitions are seamless. Without this invisible choreography, markets would be chaotic, trust would erode, and long-term participation would dwindle.
Nirav: I keep hearing people say “the market is structured”, what does that mean? Isn’t it just buyers and sellers?
Vedant: There’s more to it. The market has layers exchanges, brokers, clearing houses, depositories, all working together so trades are safe, smooth, and regulated. That whole setup is called market structure.
11.2 What is Market Structure?
The share market operates through a layered structure designed to facilitate smooth and secure trading. At the core are the stock exchanges like NSE and BSE, where orders are placed and matched electronically. Once a trade is executed, the clearing corporation—like NSCCL—steps in to guarantee that both buyer and seller meet their obligations. This entity becomes the legal counterparty to both sides, ensuring settlement happens even if one defaults. Depositories (NSDL and CDSL) hold the securities in demat form and update ownership records. Each entity works in harmony to ensure trust, transparency, and efficiency in trade execution.
Rohan wants to buy shares of Infosys. He places an order through 5paisa (his broker), which routes the order to NSE. The exchange finds a matching sell order and executes the trade. NSCCL steps in as the clearing corporation to ensure the deal goes through even if one party defaults. The shares are held by CDSL, which records the transaction in Rohan’s demat account. Each layer—from broker to exchange to clearing to depository—forms the invisible scaffolding that supports this transaction.
Nirav: So Vedant, when I tap “Buy” on my app, what actually happens?
Vedant: Good question. It triggers a chain of steps, your broker sends the order to the exchange, matching happens, and behind the scenes, money and stocks get ready to swap hands the next day.
11.3 What Happens When You Buy a Stock?
When you place a buy order via your broker or trading app, it is sent to the stock exchange. Once matched with a seller’s price, a trade is executed. But that’s just the beginning. On the next working day (T+1), your funds are earmarked—meaning blocked—for that specific trade. The clearing corporation ensures all obligations are met. By T+2, the depository (NSDL or CDSL) credits your demat account with the purchased shares. So while it feels instant, the real magic unfolds over two days in the background.
Say Priya buys 100 shares of Reliance at ₹2,800 each. On trade day (T), the exchange matches her order. On T+1, ₹2,80,000 is earmarked (blocked) in her bank account. By T+2, NSDL credits those 100 shares into her demat account. Priya now officially owns the shares, but the actual transfer took two days and multiple entities working behind the scenes to complete.
Nirav: Selling feels just as easy. I tap “Sell” and the amount shows up soon. What’s going on in the backend?
Vedant: When you sell, your shares get locked, the exchange finds a buyer, and once matched, the clearing process kicks in. Your shares go out and money comes in—all tightly tracked.
11.4 What Happens When You Sell a Stock?
Selling reverses the buying steps. Once your sell order is matched on the exchange, your demat account is earmarked for the quantity of shares sold. These shares are frozen—reserved for transfer. On T+1, the clearing corporation ensures the buyer has the funds and you have the shares. On T+2, your shares are debited from your account, and your bank account is credited with the proceeds. It’s a trust-driven relay where each entity passes the baton seamlessly.
Suppose Aarav decides to sell 50 shares of TCS. He places the order on a Monday. Once matched, those 50 shares are earmarked in his demat account—frozen for delivery. By Wednesday (T+2), NSCCL ensures the buyer has paid, and the shares are debited from Aarav’s account. That evening, his bank account receives the money, say ₹1,75,000. To him, it’s a quick trade—but the machinery that made it happen ran a tight, regulated schedule.
Nirav: Vedant, my app said “Shares earmarked for selling.” What does that even mean?
Vedant: That means your shares are temporarily marked or reserved for that trade. It stops you from selling them again while the settlement is being completed.
11.5 What is Earmarking?
Earmarking is the process of reserving resources—either funds or shares—specifically for a trade that’s already been executed but not yet settled. For a buyer, earmarking blocks the exact amount needed in your bank account so the money can be transferred on T+2. For a seller, it freezes the relevant shares in your demat account so they can’t be sold again or transferred elsewhere. It’s like placing a tag on items in a store marked “SOLD”—you still possess them, but they’re off-limits until the buyer picks them up.
Let’s say Simran wants to sell her 25 shares of HDFC Bank. When she places the sell order, these 25 shares are earmarked by CDSL. Even though the shares remain in her demat account, she can’t transfer or sell them elsewhere—they’ve been tagged for this specific settlement. It ensures that when the buyer comes calling on T+2, those shares are ready to go—no surprises, no delays.
Nirav: Vedant, I’ve got to admit—understanding how trades settle and how the system keeps everything in sync is pretty cool. It’s like there’s an invisible safety net behind every trade.
Vedant: Exactly. Most traders don’t realize the effort that goes into making a simple “buy” or “sell” look effortless. Clearing, settlement, and market structure are the silent engines of trust.
Nirav: So now that the trade is done and settled, what’s next for a stockholder?
Vedant: This is where corporate actions come in—dividends, bonus shares, splits, mergers. All these decisions made by companies directly affect stock prices and investor value.
Nirav: I’ve seen news flashes like “XYZ announces 1:2 bonus issue.” Does that mean I get extra shares?
Vedant: That’s right. These actions change the number of shares you hold or the value per share—but your overall investment stays balanced.
11.1 What is the clearing and settlement process
Nirav: Vedant, I clicked “Buy” on a stock yesterday and saw it in my portfolio today. It felt instant—how does that work so fast?
Vedant: It feels instant, but there’s a whole system running quietly behind the scenes. The trade has to be cleared and settled properly.
Nirav: You mean like paperwork?
Vedant: Not anymore! Today, it’s digital and follows something called a T+1 cycle—your trade gets settled the very next working day. Behind that smooth process are clearing corporations and depositories making sure money and shares move safely.
Nirav: So even though it looks quick on my app, there’s a well-managed process ensuring I get my shares and the seller gets their money?
Vedant: Exactly. Think of it like a backstage crew making sure your trading show runs smoothly even if you don’t see them, they’re essential.
So,
Suppose you’re ordering groceries online. You click “Buy Now,” and it feels instant—but behind the scenes, your payment goes through a payment gateway, the store checks inventory, packs the order, and the delivery partner picks it up. By the next day, the groceries arrive at your door. That smooth experience is possible because each party did its job invisibly and efficiently.
Similarly, in share trading, when you buy stocks, it looks instant—but clearing houses, brokers, and depositories quietly work together to transfer money and shares correctly by the next day (T+1), just like how your groceries get delivered after a coordinated backend process.
The clearing and settlement process in the share market is the quiet force that transforms a trade on your screen into a legitimate transfer of ownership. When you click “buy” or “sell” on your trading app, you might feel like it happens instantly—but behind that simplicity lies a well-oiled, tightly regulated system that ensures money moves in one direction and stocks in the other, without errors or fraud. It’s this process that allows millions of investors to transact daily with confidence.
The Indian share market follows a T+1 rolling settlement cycle, meaning trades are settled one working day after the transaction date. This accelerated timeline has increased efficiency and liquidity, giving investors quicker access to both securities and funds. Clearing corporations like NSCCL (for NSE) and ICCL (for BSE) are pivotal in managing this timeline by acting as intermediaries who ensure that both parties in a trade meet their obligations.
The process begins once a trade is executed. Trade information is transferred to the clearing corporation, which identifies the obligations of each party—how much cash the buyer owes and how many shares the seller must deliver. The clearing house also manages risk by collecting margins and ensuring that defaults don’t ripple through the system. All this happens with automation and strict regulatory oversight.
Settlement refers to the actual transfer of securities from seller to buyer and funds from buyer to seller. This is executed via depositories like NSDL and CDSL, which maintain investor demat accounts. On settlement day, securities are credited and debited electronically. What makes the Indian system robust is the use of netting—where only net obligations are settled, reducing transaction volumes and increasing efficiency.
In essence, the clearing and settlement system functions like a vigilant backstage crew at a theatre. While the audience enjoys the performance (i.e., trading), the crew ensures the lights stay on, the props are in place, and the transitions are seamless. Without this invisible choreography, markets would be chaotic, trust would erode, and long-term participation would dwindle.
Nirav: I keep hearing people say “the market is structured”, what does that mean? Isn’t it just buyers and sellers?
Vedant: There’s more to it. The market has layers exchanges, brokers, clearing houses, depositories, all working together so trades are safe, smooth, and regulated. That whole setup is called market structure.
11.2 What is Market Structure?
The share market operates through a layered structure designed to facilitate smooth and secure trading. At the core are the stock exchanges like NSE and BSE, where orders are placed and matched electronically. Once a trade is executed, the clearing corporation—like NSCCL—steps in to guarantee that both buyer and seller meet their obligations. This entity becomes the legal counterparty to both sides, ensuring settlement happens even if one defaults. Depositories (NSDL and CDSL) hold the securities in demat form and update ownership records. Each entity works in harmony to ensure trust, transparency, and efficiency in trade execution.
Rohan wants to buy shares of Infosys. He places an order through 5paisa (his broker), which routes the order to NSE. The exchange finds a matching sell order and executes the trade. NSCCL steps in as the clearing corporation to ensure the deal goes through even if one party defaults. The shares are held by CDSL, which records the transaction in Rohan’s demat account. Each layer—from broker to exchange to clearing to depository—forms the invisible scaffolding that supports this transaction.
Nirav: So Vedant, when I tap “Buy” on my app, what actually happens?
Vedant: Good question. It triggers a chain of steps, your broker sends the order to the exchange, matching happens, and behind the scenes, money and stocks get ready to swap hands the next day.
11.3 What Happens When You Buy a Stock?
When you place a buy order via your broker or trading app, it is sent to the stock exchange. Once matched with a seller’s price, a trade is executed. But that’s just the beginning. On the next working day (T+1), your funds are earmarked—meaning blocked—for that specific trade. The clearing corporation ensures all obligations are met. By T+2, the depository (NSDL or CDSL) credits your demat account with the purchased shares. So while it feels instant, the real magic unfolds over two days in the background.
Say Priya buys 100 shares of Reliance at ₹2,800 each. On trade day (T), the exchange matches her order. On T+1, ₹2,80,000 is earmarked (blocked) in her bank account. By T+2, NSDL credits those 100 shares into her demat account. Priya now officially owns the shares, but the actual transfer took two days and multiple entities working behind the scenes to complete.
Nirav: Selling feels just as easy. I tap “Sell” and the amount shows up soon. What’s going on in the backend?
Vedant: When you sell, your shares get locked, the exchange finds a buyer, and once matched, the clearing process kicks in. Your shares go out and money comes in—all tightly tracked.
11.4 What Happens When You Sell a Stock?
Selling reverses the buying steps. Once your sell order is matched on the exchange, your demat account is earmarked for the quantity of shares sold. These shares are frozen—reserved for transfer. On T+1, the clearing corporation ensures the buyer has the funds and you have the shares. On T+2, your shares are debited from your account, and your bank account is credited with the proceeds. It’s a trust-driven relay where each entity passes the baton seamlessly.
Suppose Aarav decides to sell 50 shares of TCS. He places the order on a Monday. Once matched, those 50 shares are earmarked in his demat account—frozen for delivery. By Wednesday (T+2), NSCCL ensures the buyer has paid, and the shares are debited from Aarav’s account. That evening, his bank account receives the money, say ₹1,75,000. To him, it’s a quick trade—but the machinery that made it happen ran a tight, regulated schedule.
Nirav: Vedant, my app said “Shares earmarked for selling.” What does that even mean?
Vedant: That means your shares are temporarily marked or reserved for that trade. It stops you from selling them again while the settlement is being completed.
11.5 What is Earmarking?
Earmarking is the process of reserving resources—either funds or shares—specifically for a trade that’s already been executed but not yet settled. For a buyer, earmarking blocks the exact amount needed in your bank account so the money can be transferred on T+2. For a seller, it freezes the relevant shares in your demat account so they can’t be sold again or transferred elsewhere. It’s like placing a tag on items in a store marked “SOLD”—you still possess them, but they’re off-limits until the buyer picks them up.
Let’s say Simran wants to sell her 25 shares of HDFC Bank. When she places the sell order, these 25 shares are earmarked by CDSL. Even though the shares remain in her demat account, she can’t transfer or sell them elsewhere—they’ve been tagged for this specific settlement. It ensures that when the buyer comes calling on T+2, those shares are ready to go—no surprises, no delays.
Nirav: Vedant, I’ve got to admit—understanding how trades settle and how the system keeps everything in sync is pretty cool. It’s like there’s an invisible safety net behind every trade.
Vedant: Exactly. Most traders don’t realize the effort that goes into making a simple “buy” or “sell” look effortless. Clearing, settlement, and market structure are the silent engines of trust.
Nirav: So now that the trade is done and settled, what’s next for a stockholder?
Vedant: This is where corporate actions come in—dividends, bonus shares, splits, mergers. All these decisions made by companies directly affect stock prices and investor value.
Nirav: I’ve seen news flashes like “XYZ announces 1:2 bonus issue.” Does that mean I get extra shares?
Vedant: That’s right. These actions change the number of shares you hold or the value per share—but your overall investment stays balanced.
