Before getting to the shut period process let us understand the settlement process since it is directly linked to the shut period.

Whenever a bond or a stock is purchased, two important dates need to be considered. T refers to the transaction date. T+1, T+2, and T+3 are the dates that occur on a transaction plus one day, plus two days and plus three days, respectively. On one of these dates, the clearing corporation transfers the money from the buyer to the seller account, and the securities from the seller are transferred to the buyer Demat account. The date on which this happens is called as Settlement Date or the day on which the transaction is settled.

G-sec/Bonds/Debentures keep changing hands in the secondary market. The issuer pays interest to the registered security holders as of a certain date. Such a date is called a Record Date.

Securities are not transferred in the books of the Issuer between the Record Date and the Coupon or Interest Payment Date. This period is termed as a “shut period”. Under the shut period the delivery of securities cannot happen i.e. no settlement process will be executed for the securities under the shut period.

This was implemented to avoid the confusion of coupon payment on a bond in the exact account holder. It is a period of no purchase or sale of securities in order to utilize the time to settle the accounts.

A longer shut period directly impacts the liquidity of the securities as the securities are restricted to trade at this duration

Therefore, the Reserve Bank of India modified its shut period to allow dealers to trade bonds during the shut period to improve market liquidity during the period.