What happens when there’s a short delivery of shares and the exchange finds no fresh sellers in the auction markets?
If a short delivery of shares occurs, and the exchange is unable to find fresh sellers in the auction market, then they are considered to be closed out. Instead of delivering the shares to the buyers, the exchange makes the settlement in cash, which depends on the close out rate.
The close out rate will be at its highest in the exchange from the trading day till the auction day for the scrip which was short delivered, or 20% above the official settlement price on the auction day, whichever happens to be greater. This will then get passed to the buyer. You can consider it somewhat as a compensation to the buyer for the non-delivery of the shares.
Let’s understand this with an example:
Think that you have bought 100 shares of TATA Motors for Rs. 500 each and these shares were short delivered, which is why you don’t receive the delivery on T+1 day. The exchange will then organize an auction from where it will attempt to find fresh sellers who can deliver 100 shares of TATA Motors, so that they can be finally be delivered to you. If no fresh sellers happen to be in the auction market, then the trade gets settled by closing out.
Now assume, the official settlement price of TATA Motors on the auction date, i.e., T+1 was Rs. 600. In this scenario, the exchange will close the trade at Rs. 720 (20% higher than Rs. 600), and the seller of the stock who defaulted will have to incur an auction penalty of Rs. 12,000 (720 – 600 x 100). So the buyer would get Rs. 72,000 in total, i.e., Rs. 60,000 which is the Settlement price on the auction date along with Rs. 12,000 which is the auction penalty.
However, if the price of TATA Motors had reached Rs. 760, i.e., from the trading day till the auction day, then the close out would have been done at Rs. 760 and not Rs. 720 as it is higher than the settlement price + 20% of the auction penalty of the TATA Motors.
The above practice is also applicable for Internal Shortages. Refer to the NSE and BSE shortage handling procedure here: NSE BSE
Please note: Close-out of securities under Corporate Action - Where auction pay-out cannot be done on or before Record Date/ Book closure – 1 business day, shortages shall be directly closed out at the highest price prevailing across the Exchanges from the day of trading till the day of auction or 10% above the settlement price on the auction day, whichever is higher, or as declared from time to time
What is a Buyback/Takeover/Delisting?
My order is getting rejected with the following error – ‘Order price is outside the trade execution range. Try placing the order again
My order is getting rejected with the following error – ‘The order was rejected to avoid self trade. Try placing the order again’.
Why was the stop loss executed even though the price did not breach the trigger?