What is a Contract Note and Why is it Important?
Contract note is a legal document containing the details of every stockbroker’s trade on a stock exchange. It contains information like the date on which the trade was carried out, confirmation that it was conducted on behalf of a client, and the stock exchange information (BSE/NSE).
It also shows the price, GST, brokerage and the applicable securities transaction tax. Contract notes were the only way to maintain records of their trades. Read on to know their importance, contents, charges and example.
Why is a Contract Note Important?
The growing numbers of retail investors also increase the likelihood of conflict and fraud. That’s why the Securities Exchange Board of India (SEBI) took measures to protect retail investors, one of which was the contract note.
A contract note contains all relevant information about trade, such as service tax, STT, price, brokerage, date of trade, etc. The contract note format is fixed and helps eliminate any confusion and discrepancies in the trading process.
The document assures the investors that their brokers have completed the trade as directed. It’s an important document to take legal action against the broker in case of conflict. Thus, investors must ensure they get their contract notes as soon as they place their trade orders.
The most important uses of contract notes include brokerage calculation, capital gains calculation, IT return filing, checking the legality of transactions, and filing a lawsuit in case of misconduct by a broker.
Contract notes give information on all share trading and transactions. Reading the contract note will help the investor identify every minute detail of trades carried. Below are the primary sections of a contract note in the case of shares or securities trading –
1. Buy and Sell
This section includes whether the investor has placed a buy or sell order.
2. Quantity Transacted
This section includes the number of securities that were a part of the trade. A positive number indicates that a buy order was placed, and a negative number indicates the investor has placed a sell order.
3. Per Unit Gross Rate
This section contains the security price when carrying out the order
4. Per Unit Brokerage
All trades have a mandatory brokerage fee mentioned in the per unit brokerage section of the contract note for shares.
5. Total Net (Before Levies)
This section of the contract note contains the total amount generated by the trade before any fees or charge deductions.
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What are the Contents of a Contract Note?
All essential information is included in a contract note. Some necessary fields are trade date, period, quantity exchanged, etc. The note also includes a reference number that investors can use to verify or authenticate transaction information with the stock exchange.
Contract notes follow a standard format and contain the following details:
- The sub-broker or trading member details, including their Securities and Exchange Board of India registration number.
- Information relevant to the trade, including the order number, price of the security, size of the transaction, time at which the trade was executed, the total amount exchanged in trade, applicable brokerage, details of service charges, etc.
- Physical or digital signature of the authorised members.
- Rules and by-laws pertinent to arbitration.
Contract Note Sample
Contract notes from brokers may look different but have the same information. Below is a contract note sample from Zerodha:
Contract Note Charges
The cost of a physical contract note sent via courier varies based on the broker. However, digital contract notes are delivered free of charge. They are available in PDFs, and the brokers typically share them through email.
Password for a Contract Note
Since the contract note contains sensitive information, the digital file is protected by a password. Different stockbrokers use different password formats. Some brokers also keep the password as the client’s PAN number.
Final Word
Investors or traders can access the summary of their trades on a specific day through contract notes. Apart from basic trade information, they also contain details of profits and losses. They are important documents that can be used to take legal action against the stockbroker in case of disputes.
FAQs
Ans: The stockbroker issues the contract note to an investor. The document contains details of all trades conducted during a trading day. SEBI lays down directions for these trades and is included on the contract note.
Ans: With a growing number of retailers, instances of fraud are also on the rise. Contract notes are an attempt by SEBI to safeguard the interests of investors and traders. A contract note depicts information on all trades executed by an investor or trader, thus giving them a window to confirm facts or take action in case of unlawful actions.
Ans: Brokers generally send contract notes to traders after the trade has been executed. Depending on the broker, contract notes can be physical or digital. You must notify your stockbroker if you haven’t received your contract note.
Ans: A digital contract note is delivered the same day the trade is executed, whereas a physical contract note can take a few days, depending on the courier service used.
Ans: According to current SEBI guidelines, stockbrokers must issue contract notes to all traders or investors. These legally binding documents can be used to sue the broker in case of disputes.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
