Every trade has two halves: the order (matched on the exchange) and the settlement — the step where money and securities actually change hands, so the buyer receives what they bought and the seller receives their money. Settlement is handled by the exchange's clearing corporation, which also guarantees that it happens even if one side fails to pay or deliver.
What happens during settlement?
Settlement has two legs that are completed together:
- Funds — the buyer pays in the money (pay-in) and the seller receives it (pay-out).
- Securities — the seller delivers the shares (pay-in) and the buyer receives them in their demat account (pay-out).
For the equity cash market, India currently follows a T+1 cycle — settlement is completed on the trading day plus one. So if you buy shares in Delivery on Monday, they're credited to your demat account on Tuesday.
Stock-settled vs cash-settled
There are two ways a trade can be settled:
- Stock (physical) settlement — the actual securities are delivered. The buyer receives shares in their demat account and the seller's shares are debited. This is how equity Delivery trades work.
- Cash settlement — no securities change hands; only the net profit or loss in cash is settled. This is how positions that are closed before delivery — or instruments where delivery isn't practical — are handled.
| Stock (physical) settlement | Cash settlement | |
|---|---|---|
| What moves | Actual securities | Only net profit/loss in cash |
| Demat impact | Shares credited/debited | None |
| Typical use | Equity Delivery, stock F&O at expiry | Index F&O, intraday, currency |
Which securities are settled which way?
| Trade / instrument | How it settles |
|---|---|
| Equity Delivery | Stock settled — shares delivered to your demat (T+1) |
| Equity Intraday (squared off same day) | Cash settled — only the net profit/loss, no delivery |
| Single-stock F&O carried to expiry | Physically settled — actual delivery of shares (mandatory since October 2019) |
| Index F&O (e.g. Nifty, Bank Nifty, Sensex) | Cash settled — an index can't be delivered |
| Currency derivatives | Cash settled in rupees |
| Commodity derivatives | Depends on the contract — many are physically settled (the commodity is delivered), some are cash settled |
The theme: if you take delivery or hold to expiry, it's usually stock/physical settled; if you close the position first or trade something that can't be delivered (like an index), it's cash settled.
What does the clearing corporation guarantee?
When you trade, you don't actually rely on the specific person on the other side of your trade to pay or deliver. The clearing corporation steps in between the buyer and seller — a process called novation — becoming the buyer to every seller and the seller to every buyer. It acts as the central counterparty and guarantees settlement:
- Even if the other party defaults, you still receive your shares or your money — the clearing corporation makes good on the obligation.
- This guarantee is backed by a Settlement Guarantee Fund (Core SGF), maintained for each segment under rules set by SEBI, to absorb defaults.
So counterparty risk is taken off your plate — the settlement system, not the other trader, stands behind your trade. (When a seller fails to deliver shares, the shortfall is handled through a separate auction / short-delivery process.)