How and when an auction penalty is charged?

How and when an auction penalty is charged?

If a seller is unable to deliver shares on the settlement day (T+1), it is considered a short delivery. In such cases, the seller will be responsible for all resulting losses and charges, including

  1. The difference between the sale price and the auction price, if the auction price is higher.
  2. Any brokerage, exchange penalties, and applicable taxes (e.g., GST on penalties).
  3. Any additional charges as determined by the exchange or clearing corporation as due to financial closeout settlement.

To understand it better, let's first understand different scenarios after short delivery: -

Scenario 1: Auction Price > Valuation Price
If the auction price is higher than the valuation price (i.e., the T-Day closing price), the defaulting client pays the difference.

For example:

Sell Price (T Day):₹600
Valuation Price (T-Day closing price):₹625
Auction Price (T+1): ₹680
Difference to be paid by defaulting seller:
(The seller bears this difference along with applicable penalties and GST.)		 ₹680 – ₹600 = ₹80 per share


Scenario 2: Auction Price < Valuation Price
If the auction price is lower than the valuation price, the client is still charged as per the valuation price.
The difference between the valuation price and the auction price is transferred to the Investor Protection Fund (IPF).

For example:

Sell Price (T Day):₹600
Valuation Price (T-Day closing price):₹625
Auction Price (T+1): ₹600
Difference to be paid by defaulting seller :
(The seller bears this difference along with applicable penalties and GST.)		Even though the shares were bought in the auction at ₹600, the client is charged ₹625 per share.


The difference of ₹25 per share (₹625 – ₹600) is not refunded but transferred to IPF (Investor Protection Fund).


Scenario 3: No Sellers in Auction Market — Close-Out Settlement

If no sellers are available in the auction, the exchange performs a close-out settlement where the buyer receives a cash payout instead of shares. The defaulting client is charged the close-out price, as per the exchange-determined formula as per settlement guidelines.

Closeout price — Settlement is done in cash at the higher of the following:

  1. The highest price of the stock between T (trade day) and T+1, or
  2. 20% above the closing price on T day.