Close-out settlement:
If the seller fails to deliver the shares on the settlement day (T+1), the exchange conducts an auction on the same day (T+1) to procure the short-delivered shares. The shares are then delivered to the buyer’s demat account on T+2 day.
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.
For example, shares are purchased on Monday (T day). If delivery fails on Tuesday, the exchange conducts an auction on the settlement day (T+1). If shares are successfully procured, they are delivered to the demat account of the buyer on Wednesday (T+2 days). If shares are not procured through auction, then the buyer will be provided funds instead of shares on Wednesday (T + 2 days).
RELATED FACTS: - 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:
a) The highest price of the stock between T (trade day) and T+1, or
b) 20% above the closing price on T day.
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