What Is Contract Note and Its Significance

In the finance and the stock market, trust and security are very important for investors and traders. One such document that plays a paramount role in financial transactions is the Contract Note. This blog will help you understand the contract’s note definition, importance, and purpose.

Understanding contract note is of utmost importance to all market participants, whether a newcomer or an experienced professional, as it prevents fraud and acts as a legal record for future purpose.

What is a Contract Note?

It is a legal document that records all the successful transactions the broker executes. It is provided by the broker whenever a trade has been executed. All types of transactions are recorded in a contract note, including equity and derivatives (instruments whose value depends on an underlying asset such as equity, commodity, currency, etc.). A contract note was first introduced by the regulator, i.e., SEBI in India.

The SEBI also has prespecified the format of a contract note and the time by which it should be delivered by the broker that is within 24 hours of executing the trade.

The contract note includes transactions executed with timings, profit / loss summary, charges, taxes, and many more important details.

Example

Sahil is an intraday trader. On December 10, 2023, he bought shares of a steel company worth INR 12,000 and 9,000 in a textile company. Within 24 hours of executing the trades, preferably by next morning, he will receive an email with a note attached that contains details of the trade executed – the number of shares bought, at what price, charges, taxes, etc.

Purpose of a Contract Note

1. It provides all the necessary details about trades executed and allows traders and investors to monitor various trades executed throughout the day.
2. It helps the traders get a summary of the trades and facilitates record keeping for both the parties (investors and brokers). A contract note can be presented if any fraud or dispute arises. Generally, complaints can be registered up to 6 months after the transaction date.
3. It explains the differential amount in gross gain / loss and net gain / loss (gross proceeds received before any deductions of brokerages, taxes, and charges).
4. Contract notes are mandatory to ensure compliance with the regulatory authorities.

Format of a Contract Note

The name of the trading member (Stock Broker) along with its address and SEBI registration number, is mentioned at the top of the contract note.
The left side of the contract note includes:

1. Contract Note Number
2. Trade Date
3. Name of the client
4. Address of the client
5. PAN of the client
6. Unique Client Code (UCC) of client and many more details

• Information regarding the exchange on which transactions took place is shown on the right side of the contract note, including the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) or Multi Commodity Exchange (MCX).
• Settlement Number and Settlement Date under the respective exchange heads are also shown on the right side.
• The main content of the contract note is shown after the above part on the right side. The content includes:

1. Order Number – A unique number is created and assigned for each trade executed. This number will be different for each of the orders executed on the platform.
2. Order Time – Shows the exact time the order was placed.
3. Trade Time – This indicates the exact time when the order was executed on the exchange. Order time and trade time may be different due to the market momentum, exchange response time, etc.
4. Security or Contract Description – It mentions the name of the stock, futures, and options traded.
5. Buy (B)/ Sell (S) – Indicates the type of trade. It shows “B” for a buy side trade and “S” for a sell trade.
6. Quantity – This shows the number of shares or lots (in case of options and futures) bought or sold. It shows a positive number when share / lots are bought and a negative number when shares / lots are sold.
7. Gross Rate – It represents the market price of the stock at which the order was executed.
8. Brokerage per unit – Accounts for the brokerage charged for each stock / lot.
9. Net Rate per unit – Similar to gross rate/unit but there is a slight difference. The net rate per unit accounts for the actual price at which the trade occurred, excluding any brokerage fees.
10. Closing Rate/Unit – This represents the closing price of the derivatives contract traded for mark to market settlement. The Mark to market settlement is daily settlement of profit and losses arising due to the change in the security’s market value.
11. Net total before levies – Calculates the total amount liable to pay or receive after executing the trades. It excludes the fees like brokerage and taxes.

• The second half of the contract note covers all the monetary aspects, including net payable/receivable, taxes, brokerage, and STT.

1. Net payable/receivable – The last row indicates the net amount payable/receivable after all the levies and taxes. Note that Depository Participant (CDSL and NSDL) charges, call and trade charges are available in the ledger report and not specified in the contract note.
2. Taxes and Charges – Taxes and charges are calculated based on the transaction value. It includes securities transaction tax, goods and services tax, stamp duty, exchange transaction charges, and SEBI turnover fees.
3. Brokerage – Commissions or fees charged by the broker for executing trades on behalf of the client.
4. STT – Stands for Securities Transaction Tax. It is levied on all transactions made on the stock exchanges by the Government. The STT rates differ based on the product segment.

• Pay in / Pay out Obligation: This amount represents the debit and credit transactions. If a debit transaction occurs, it is denoted with a negative sign or vice versa.
• Terms and Conditions: Contract notes may contain additional terms and conditions agreed upon by the parties involved in the transaction..

A Contract Note does not contain the following details:

1. DP Charges – It means Depository Participant charges, which are levied compulsorily by the depositories (CDSL or NSDL) when shares are sold from a demat account. The DP charges are not presented on the contract note but are shown in fund statements.
2. Payment Gateway Charges – Charges levied for authorizing credit card or direct payment processing by the banks.
3. Call and Trade Charges – Call and Trade is a service offered by many brokers that offers their clients to call a specific number and place an order to buy or sell shares. The charges depend on the broker and type of brokerage plan selected.
4. Margin Details – Margin refers to the loan taken from the brokers to trade. The contract note doesn’t represent the margin details of the trades executed.
5. Others – Outstanding positions of a client, details about past trades, etc.

Conclusion

The Contract Notes are paramount to investors and traders by providing documentation and keeping records of all transactions. Understanding and utilizing the components of a contract note effectively helps investors to safeguard their interests in financial markets. It helps the investors to understand the brokerage charges and accurately assess the cost of transactions. The guidelines and format specified ensure transparency and compliance with regulatory authorities that assist investors in making informed decisions.

Frequently Asked Questions (FAQs)