When you sell the stocks, it is known as ‘T Day’. When your DEMAT account blocks the stock, it is earmarked by the end of the day for settlement. To know more about this process, please see the next section.
Before the T+2 day, the designated shares are sent to the depositary. On settlement day, they are taken from your demat account and given to the clearing corporation for payment. You should know that you will be given 80% of the money on T+1, with a further 20% on T+2. Both the buyer and the seller will be settled fully on a T+2 basis.
The settlement process between T day and T+2 is multifaceted. Your stockbroker, the clearing corporation, the depositary, and the exchange are all engaged in an intricate data transfer to guarantee discreet completion. As an investor, it is important to remember that equity transactions are finalized two days after the order date: for buyers, this means shares arrive two days later, and for sellers, their funds are credited two days later.
Earmarking and T+1 settlement
Previously, the broker had to take stocks from the selling customer for the completion of a sale. These assets were stored in their own stock account and then sent to the clearing corporation (CC) two days later. On delivery, the purchaser was given credit for the acquisition, and the transaction was considered settled. This was a common practice for brokers, who would withdraw stocks on either T day or T+1 day and forward to CC by T+2, as this is when payment is made.
From the time the shares were debited until they were settled, there was a potential for brokers to misuse clients’ securities that were lying in their pool accounts. To mitigate this risk, SEBI introduced “earmarking” for settlement. With earmarking, the shares no longer need to be taken from the client’s account; instead, they are reserved as part of an upcoming settlement for the sale transaction initiated by the client.
On settlement day, the investor’s shares are debited from their account and credited to the clearing corporation. This new process eliminates the requirement for brokers to keep client stocks in their collective account, thus averting any potential risk. As of November 2022, the use of earmarking has been made compulsory.
(check if this applies to Stoxbox as well:)
Our regulators are consistently striving to protect retail investors from any potential threats and to enhance the market structure’s efficiency. T+1 settlement system for all equity settlements had been enforced from March 2023.