7/31/2019 Indian Stock Market Mechanism

1/2

Indian Stock market mechanism

Stock market is a trading platform which provides an opportunity to buyers and sellers ofsecurities to do transactions. As of now there are 23 recognised stock exchanges in India

and 24th is likely to get functional soon. However the majority of transactions in securitieshappen only on the National Stock Exchange. The Bombay stock Exchange is the secondlargest contributor in the overall pie of total transactions. However it's contribution isrestricted to 5 to 7 percent only. There are three types of instruments that are traded on

National Stock Exchange namely equities, derivatives and debt instruments. This articleattempts to explain the procedure involved in trading and settlement of equities.Before understanding the procedure of trading and settlement, it is important to have anoverview of changes that have taken place in Indian securities market in last ten years.Three most noticeable changes which have taken place are 1) Dematerialisation , 2)

Introduction of screen based trading and 3) Shortening of trading and settlement cycles.The Depositories Act was passed by the parliament in 1995 and this paved the way for

conversion of physical securities into electronic. With establishment of National StockExchange, there was a significant change in the level of technology used for the operation of

stock market. It led to introduction of Screen Based Trading thereby removing the earliersystem of open outcry where prices of securities were quoted by symbols. Now all thetransactions happen on computer which is spread across country and connected to National

Stock Exchange through VSAT. These two factors combined together helped in reducing thetrading and settlement cycle in Indian securities market which got reduced from as long as22 days to 2 days currently.Presently in India, stock exchanges follow T+2 days settlement cycle. Under this system,

trading happens on every business day, excluding Saturday, Sunday and exchange notified

holidays. The trading schedule is between 10:00 a.m. in the morning to 3:30 p.m. in theevening. During this period , shares of the companies listed on a particular stock exchangecan be bought and sold. The SEBI has made it mandatory that only brokers and sub-brokers

registered with it can buy and sell shares in the stock exchange. A person desirous of

buying or selling shares on the stock market needs to get himself registered with one ofthese brokers / sub-brokers. There is a provision for signing of broker/sub-broker - client

agreement form. Brokers/sub brokers ask their clients to deposit money with them knownas margin based on which brokers provide exposure to the clients in the stock market.However signing of client-broker agreement is not sufficient. It is also essential for a person

to open a demat account through which securities are delivered and received. This demataccount can be opened with a depository participant which again is a SEBI registered

intermediary. Some of the leading depository in the country are Stock Holding Corporation

of India Ltd., ICICI Bank, HDFC Bank etc. If an individual buys shares ,it is in the demat

account that credit of shares are received. Similarly when a person sells shares, he has totransfer shares to the brokers account through his demat account. All the brokers/sub-brokers also essentially have a demat account.Shares can be bought and sold through a broker on telephone. Brokers identify their clients

by a unique code assigned to a client. After the transaction is done by a client broker issueshim contract note which provides details of transaction. Apart from the purchase price ofsecurity, a client is also supposed to pay brokerage, stamp duty and securities transaction

tax. In case of sale transaction, these costs are reduced from the sale proceeds and then

7/31/2019 Indian Stock Market Mechanism

2/2

remaining amount is paid to the client. Trading of securities happen on the first day while

settlement of the same happens two days after. This means that a security bought on

Monday will be received by the client earliest on Wednesday which is called pay out day bythe exchange. However there is provision which allows a broker to transfer securities till 24hours after pay out receipt. Hence the broker may transfer shares latest by Thursday for a

security bought on Monday. Any transfer after Thursday would invite penalty for the broker.

If a person has bought security then he is supposed to pay money to the broker before payin deadline which is two days after trading day but the second day is considered till 10:30a.m. Only.Hence the client must pay money to the broker before 10:30 a.m. On T+2 day.Settlement of securities is done by the clearing corporation of the exchange. Settlement of

funds is done by a panel of banks registered with the exchange. Clearing corporation

identifies payable/ receivable position of brokers based on which obligation report forbrokers are created. On T+2 days all the brokers who has transacted two days before

receive shares or give shares to the clearing corporation of exchange. This all is donethrough automated set up Depository which involves NSDL and CDSL.One of the most noticeable achievements of Indian securities market have been reduction in

the settlement cycle which has brought it at par with global securities market.If India is ableto attract huge investments in securities now, it is not only because of inherent strength of

the economy but also because stock markets have reached very advanced stage which

make outsiders to understand the process in Indian market easily.