Early Payin (EPI)
What is Early Payin and what are benefits of EPI in stock market?
The Early Payin (EPI) is a process in which the Settlement obligation is fulfilled with the Clearing House before the due date. Early pay-in of securities happens when the securities are delivered before time and early pay-in of funds happen when the total purchase amount of the transaction is deposited before time.
The main benefit of delivering the securities early is that better margins are then available to the Trader.
Example: Suppose a Trader sells shares worth INR 10,000. The Trader will not have access to the full INR 10,000, right away. That is because a margin is blocked till the securities have been delivered. So if the margin required is 25%, then only INR 7,500 will be available to the trader till the Settlement is completed.
This can be avoided if the Stock Broker opts for an Early Payin mechanism. In this process, the securities are debited from the account of the trader on the sell date itself. By delivering the securities early, the trader gets access to the full INR 10,000 as soon as the sell transaction is done.
How does Early Payin work?
Due to the Settlement Cycle, there is a gap between execution a trade and Settlement of the transaction. As explained in Settlement Process, in a T+1 settlement cycle, the securities are delivered in the following way:
Normal Pay-in
01-January
Suppose that a trader sells securities on this day.
Clearing Process is completed and obligations are notified
02-January
The Broker debits the securities from the Demat Account of the investor and puts them in a securities pool account.
Settlement Process is done and securities are transferred to the beneficiary from the pool account.
Now, let us see how the process works when paying in early.
Early Pay-in
01-January
Suppose that a trader sells securities on this day.
The Broker debits the securities from the Demat Account of investor and puts them in an Early Pay-in account.
Clearing Process is completed and obligations are notified. The Clearing House will know that the securities have already been delivered.
02-January
Settlement Process is done and securities are transferred to the beneficiary.
Early Payin in BTST trades
A special scenario in which the Early payin of securities is particularly helpful to investors is in the case of Buy Today Sell Tomorrow (BTST) trades. Some Brokers directly move the securities received in their pool account to the Early Pay-in account if the trade is BTST.
In this case, a typical BTST trade in a T+2 Settlement Cycle would look like this:
01-January
Trader buys shares for delivery at INR 100.
02-January
The share price moves up to INR 105 and the trader sells the share
Clearing Process is completed and obligation is notified.
03-January
The shares bought on 01-January are delivered to the pool account of the Stock Broker
These securities are moved directly to the Early Payin (EPI) account for Clearing.
(The Trader does not get delivery of the shares in their Demat Account)
04-January
The transaction is settled by giving delivery from the EPI account. (To give delivery for the sell order on 02-January)
As it can be seen, instead of crediting shares to the Demat Account of the Trader on 03-January and then debiting the shares again on 04-January, the Broker moves the securities to the EPI account. The trader never receives the shares in the Demat account and therefore, does not have to pay any DP Charges at sell time.
However, some Brokers do not use Early Payin anymore for BTST trades. Instead, they opt for the new Settlement Process where securities can be directly earmarked in the Demat Account of the investor.
Earmarking of securities (New Settlement process)
A new Settlement process is now available to the Stock Brokers, if they want to opt for it. In this process, the Clearing Members who have an obligation to send securities, can earmark the securities (for delivery) in the Demat Account of their client.
This is a way to block the securities in the account and let the Clearing Corporation know that the securities will be debited directly from the Demat Account of the investor. So, the Clearing Member does not have to transfer the securities from the Demat Account of their client to the pool account. Hence, the investor maintains ownership of the shares till they are debited on Settlement day.
Problems of Early Payin
An interesting thing to note when paying in early is that the stocks are debited from the Demat Account of the investor and transferred to a dedicated EPI account. Therefore, the investor will not be registered as the owner of the securities till the Settlement process is done.
This causes an issue of ownership in case the Record Date of any Corporate Action falls on T-day or T+1 day.
Example:
Suppose the trader sells shares on 01-January and pays in early. The shares will be debited from the Demat Account of the investor on the same day and submitted to the Early Pay-in account. Now, the shares will remain here until the Settlement Process has been completed.
So, if the company has a record date for Corporate Actions like Dividend, Bonus, Splits etc. on 01-January or 02-January, then the benefit will not be credited to the investor. Therefore, investors should sell the shares only after record date if their Brokers are doing an Early Pay-in for settlement.
Therefore, it is important for investors to check the Clearing and Settlement mechanism followed by their Broker and then adjust their trades accordingly.
Disclaimer
- This page is for education purpose only
- Some information could be outdated / inaccurate
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