As per the current settlement cycle, trades are settled on a T+1 basis, i.e., the transaction is completed one working day after the trade date. However, short delivery occurs when the seller of a stock fails to deliver the shares on T+1 (settlement) day to the exchange for credit to the buyer’s demat account.
In such cases, the exchange holds an auction on T+1 to buy the undelivered shares from the open market and deliver them to the original buyer on T+2. This is known as share auction.
If the exchange is unable to procure the shares in the auction, the client’s Jainam account is credited with a cash amount based on the close-out price determined by the exchange. This is known as financial closeout.
For example, if Mr. A buys shares through Jainam on Monday (T day) and if the seller fails to deliver the shares to the exchange on T+1 (Tuesday), then an auction is conducted by the exchange on the same day (Tuesday).
If the shares are procured through the auction, then they will be delivered to the client on T+2 (Wednesday).
Auction Timings:
The auction takes place daily between 2:00 PM and 2:45 PM, usually starting after 2:30 PM, and lasts for 30 minutes.
Auction Price:
The auction price is set within a predefined range by the exchange, which is 20% below to 20% above the stock’s closing price on the trade day (T day).
Causes of short delivery of shares:
- Selling without holding shares: Traders sell shares they don’t actually own, often by mistake or speculation. If they fail to buy them before settlement, short delivery happens.
- Unclosed intraday short positions: The most common instance of short delivery is when traders short sell intraday but can’t buy back due to low liquidity or upper circuit limits, and hence they can’t deliver the shares.
- BTST trades: In “Buy Today, Sell Tomorrow” trades, if shares aren’t received in time, selling them may result in short delivery.
- Illiquid or upper circuit stocks: Such stocks can’t be easily bought, increasing the chance of delivery failure.
- Operational errors: Mistakes by brokers or in settlement can also lead to short delivery.
RELATED FACTS: - If the exchange is unable to procure shares in the auction, a close-out settlement will be processed instead of delivering the shares. In such cases, the client receives funds instead of securities.
- The defaulting broker (whose client failed delivery) is not allowed to participate in the auction. The exchange acts as the buyer, and only sellers who already have shares in their demat account (i.e., settled holdings) can participate.
- Shares bought a day before cannot be sold in the auction.
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