Understanding the Trading and Settlement Process and Other Documentary Requirements at Brokers Office to Open the Trading

Account
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF MASTER OF BUSINESS ADMINISTRATION (MBA) IN GUJARAT TECHNOLOGICAL UNIVERSITY

Under the Guidance of Miss.Krishna Gor

Prepared by Kaushik M. Parmar (107020592049) MBA SEMESTER - IV [Batch: 2010-12]

(ANAND INSTITUTE OF MANAGEMENT) MBA PROGRAMME Affiliated to Gujarat Technological University Ahmedabad

Understanding Trading and Settlement of Equities

Stock market is a trading platform which provides an opportunity to buyers and sellers of securities to do transactions. As of now there are 23 recognized stock exchanges in India and 24th is likely to get functional soon. However the majority of transactions in securities happen only on the National Stock Exchange. The Bombay stock Exchange is the second largest contributor in the overall pie of total transactions. However it's contribution is restricted 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. Before understanding the procedure of trading and settlement, it is important to have an overview of changes that have taken place in Indian securities market in last ten years. Three most noticeable changes which have taken place are 1) Dematerialization, 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 Stock Exchange, 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 earlier system of open outcry where prices of securities were quoted by symbols. Now all the transactions happen on computer which is spread across country and connected to National Stock Exchange through VSAT. These two factors combined together helped in reducing the trading and settlement cycle in Indian securities market which got reduced from as long as 22 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 the evening. During this period, shares of the companies listed on a particular stock exchange can 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 of these 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 known as 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 demat account can be opened with a depository participant which again is a SEBI registered intermediary. Some of the leading depository in the country is 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 to transfer 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 issues him contract note which provides details of transaction. Apart from the purchase price of security, 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 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 by the exchange. However there is provision which allows a broker to transfer securities till 24 hours 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 pay in deadline which is two days after trading day but the second day is considered till 10:30 a.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 for brokers is created. On T+2 days all the brokers who have transacted two days before receive shares or give shares to the clearing corporation of exchange. This all is done through automated set up Depository which involves NSDL and CDSL.

One of the most noticeable achievements of Indian securities market has been reduction in the settlement cycle which has brought it at par with global securities market. If India is able to 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.

Trade Clearing and Settlement in Stock Markets

Clearing and settlement is a post trade activity.

Clearing Agencies ensure trading members meet their fund/security obligations. It acts as a legal counter party to all trades and guarantees settlement for all members. The original trade between the two parties is cancelled and clearing corporation acts as counter party to both the parties, thus manages risk and guarantees settlement to both the parties. This process is called novation.

It determines fund/security obligations and arranges for pay-in of the same. It collects and maintains margins, processes for shortages in funds and securities. It takes help of clearing members, clearing banks, custodians and depositories to settle the trades.

The settlement cycle in India is T+2 days i.e. Trade + 2 days. T+2 means the transactions done on the Trade day, will be settled by exchange of money and securities on the second business day (excluding Saturday, Sundays, Bank and Exchange Trading Holidays). Pay-in and Pay-out for securities settlement is done on a T+2 basis.

The following is the summary of trading and settlement process in India. 1. Investors place orders from their trading terminals. 2. Broker houses validate the orders and routes them to the exchange (BSE or NSE depending on the clients choice) 3. Order matching at the exchange. 4. Trade confirmation to the investors through the brokers. 5. Trade details are sent to Clearing Corporation from the Exchange. 6. Clearing Corporation notifies the trade details Members/Custodians who confirm back. Based on the Clearing Corporation determines obligations. to clearing confirmation,

7. Download of obligation and pay-in advice of funds/securities by Clearing Corporation. 8. Clearing Corporation gives instructions to clearing banks to make funds available by pay-in time. 9. Clearing Corporation gives instructions to depositories to make securities available by pay-in-time. 10.Pay-in of securities: Clearing Corporation advises depository to debit pool account of custodians/Clearing members and credit its (Clearing Corporations) account and depository does the same. 11.Pay-in of funds: Clearing Corporation advises Clearing Banks to debit account of Custodians/Clearing members and credit its account and clearing bank does the same. 12.Payout of securities: Clearing Corporation advises depository to credit pool accounts of custodians/Clearing members and debit its account and depository does the same.

13.Payout of funds: Clearing Corporation advises Clearing Banks to credit account of custodians/ Clearing members and debit its account and clearing bank does the same. Note: Clearing members for buy order and sell order are different and Clearing Corporation acts as a link here. 14.Depository informs custodians/Clearing members through Depository Participants about pay-in and pay-out of securities. 15.Clearing Banks inform custodians/Clearing members about pay-in and payout of funds. In case of buy order by normal investors clearing members instruct his DP to credit the clients account and debit its account. The money will be debited (Total settled amount margins paid at the time of trade) from the clients account. In case of sell order by normal investors Clearing members instruct his DP to debit the clients account and credit its account. The money will be credited to the clients account.

In case of trades by mutual fund houses the custodians act as clearing members.

Please note that a clearing member is the brokerage firm which acts as a trading member and clearing member of clearing agency where as custodians are only clearing members. Even if the clients dont meet their obligations clearing members are required to meet their obligations to the clearing corporations.

Documentary requirement at brokers office for open a trading account

Process to open trading account for trading in Indian stock market If you are interested in stock market trading the first thing that you need to have is a stock trading account and the DP account. Stocks are traded at the stock market through the brokers who execute your buy or sell orders and the stocks are traded through your trading account and stocks are deposited to your DP account. You can either choose to trade through the conventional offline stock trading or you can trade online but in both cases you must have the trading account. For opening a stock trading account you need to register with any of the online trading portals or you can contact a broker for opening the trading account. The service providers will take a nominal charge for opening the account and in most of the stock broker firms will charge an annual fee for maintain the trading account. You need to also submit documents that will prove your identity, residential address and of course your income details. In India you need to have the Permanent Account Number or the PAN for opening the stock trading account.

There are so many online trading portals that are offering online trading facilities to the investors. There are of course different fees that are offered by the companies and the facilities and terms and conditions also vary from one company to the other. So you need to choose the service provider diligently so that you get the best service at the best price. Here we are offering some practical tips that will help you select the best service provider when it comes to stock trading.

Reputation While choosing the service provider for opening share trading account the first thing that you should consider is the reputation of the company in

the market. You can search and read the reviews about the company on the internet, you can read about the performance of the company at the financial newspapers and magazines, you can ask your friends do whatever but make sure you subscribe the service of the company that has a proven track record and a name in the market.

Service Then of course you should consider the standard of service that the company is offering. That will take into consideration the quality and efficiency of the system that they use, the expertise of the staffs and the extent of service they are offering. Be sure that the company is offering trading facilities at the stock markets that you are actually interested in trading. Besides you should also enquire if the website is supporting derivative trading, IPO investment, mutual fund investment and so on. The more you get is better as you would not need to go somewhere else for these investments.

Security - The security of your personal and banking details and financial information is a matter of great concerns. Especially if you are trading online and using online fund transfer facilities you need to be extra careful. Make sure that the company implements best online security measures to protect your financial and personal data when you are trading online through their website.

Brokerage Fees The market for online trading companies are too much competitive as there are more and more companies coming to this business. This is of course good news for the investors. You can now expect really comparative pricing for the online trading services. So while opening the online trading account you need to make sure you find the best deal that is available in the market.

Consultancy service before opening the trading account with a certain company you should look for the consultancy and research and analysis services that are offered by the company. You can in fact keep a close watch on the daily tips that

these companies offer and see who is providing the most profitable stock tips. These consultancy and stock tips are provided by the firms at free of cost and you can really benefit from them for making some profitable stock market investments.

Documents require for individual are as follows:

1. Two recent passport size color photographs (Demat &Trading) 2. Identity Proof: PAN CARD (Mandatory) 3. Proof of Bank Account: Any one of the following document given below 4. Copy of Bank Statement (latest 6 months) Copy of first page of the Bank Pass Book. A cancelled cheque MICR Proof (in case Baroda, Rajkot, Surat, Mumbai, Ahmadabad)

Proof of Address: Any one of the following document given below a) b) Passport Voter ID card Driving license Bank Pass book Verified copies of: Electricity bill or Landline telephone bill in the customers name Leave and license agreement/agreement for sale.

5. Account Opening Cheque 6. You should open an internet enabled savings account with HDFC BANK, ICICI BANK, AXIS BANK, BANK OF BARODA, BANK OF INDIA, etc.