Why was the BTST settlement process changed on Zerodha?
The BTST settlement process was changed from 3rd June 2021 onwards. Here is a quick note to help you understand what the change in the settlement process is and why DP charges are now applicable.
Old settlement process for BTST transactions
Here is an example, you purchase 100 shares of Reliance Industries on Monday and sell the same on Tuesday, and thus carry out a BTST transaction. In the background, the following process was carried out –
- Shares bought on Monday (T day) would be delivered by the clearing corporation on T+1 day, i.e. Tuesday, in the broker’s pool account.
- Instead of crediting the shares to the client’s demat account and then debiting it again towards the settlement of the sale transaction, the shares would be moved from the broker’s pool account directly to the clearing corporation by means of Early Payin (EPI). To learn more about EPI, see zerodha.com/z-connect/featured/changes-in-margin-requirements-from-sep-1-2020
- Settlement is considered complete.
- In this process, the shares are directly hitting the client's demat account. Hence there was no credit or debit of shares, hence no DP charge.
The above process, although simple, had few operational issues. If the BTST trade was carried around the ex-date/record of a corporate action, then:
- The broker would receive the dividends
- Bonus/Split shares would be credited to the broker
This was because on the day of the corporate action, since the shares were lying in the broker’s pool account, the broker was considered the owner. The broker then had to reconcile each and every transaction and give the necessary credits to the client. This added to the broker's operational overheads and created a lot of confusion among clients. Hence, Zerodha has now moved to a new settlement process.
New settlement process
Around May 2021, the clearing corporation and the depositories have introduced changes (PDF) in the settlement process. Clearing members can now earmark securities to be given to the clearing corporation from the client’s Demat account by way of EPI of securities instead of moving the stocks from the client’s Demat to the broker’s pool and then to the clearing corporation.
With the new EPI process, we have changed the way BTST trades are settled to avoid issues around corporate actions. Let's take up the same example to understand how it works –
- 100 shares of Reliance are bought on Monday, sold on Tuesday, and a BTST transaction is carried out.
- Shares bought on Monday (T day) will now be credited to the client's demat account on T+1 day, i.e. Tuesday after we receive it from the Clearing Corporation (CC)
- On the same day when the shares hit the demat account, i.e. T+1, the shares will be earmarked for delivery for the sale transaction executed on Tuesday.
- The earmarked shares on Tuesday are debited on Wednesday, and the settlement is complete.
The advantage of this process in case a client did a BTST transaction when there is a corporate action –
- Dividends will be credited to the client’s bank account. There is no need for the broker to reconcile
- Bonus and splits are credited to the client’s demat account.
- In case of any TDS on dividends, the dividend issuing company will file against the client’s PAN and would reflect in the client’s tax credit statement (Form 26AS) instead of it being passed on from the Broker's PAN.
However, since the shares now hit the client’s demat and get debited the next day, DP charges of Rs.13.5 + 18% GST is applicable on the BTST trade.