is Short Delivery and Auction of Shares
A person investing in the stock market for long term or short term
purchases the shares and sells them at a later period. In such scenario, the person buying the shares has to
take the delivery of the shares in his demat
account. The concept of delivery is purchasing today and selling it off on a later date.
However, if the trader purchases and sells the shares on
the same day then in such scenario there is no need for delivery of shares as
the transaction is settled on the same day i.e. intraday.
The equity segment in India
operates on T+2 day basis i.e. if you buy the shares on Monday, you will receive
its delivery on Wednesday. Similarly, if you sell the shares on Monday you are
liable to give the delivery of shares to the Exchange by Wednesday.
Let us understand the concept
of delivery with a practical example:
Suppose you purchased 5,000
shares of GMR Infra on Monday which you are going to hold for the long term. In such case, you will receive the shares in your demat account on Wednesday i.e. T+2 day.
us now understand the meaning of short delivery.
of Short Delivery
The concept of short delivery
is different from the delivery you take while purchasing the share. When a
trader takes a short intraday position by selling the shares, he is obliged to
cover his position by purchasing those shares on that day itself. However, on
failing to do so for whatsoever reason his trade position will reflect selling of
shares without any delivery in hand. Such delivery position of shares is termed
as short delivery.
In case you are already
holding the delivery of shares, you are liable to give the delivery of shares
within two days of selling it, whereas in the case
of short delivery this is not possible as you do not have any shares in demat account to cover the short sell. In such scenario, you would end up defaulting on short
delivery. This will lead to auction of
is Auction of Shares?
It is the duty of the Exchange
to ensure that the buyer will receive the delivery of the shares from the
seller of the shares in T+2 settlement period. If the seller fails to fulfil
his delivery obligation and not deposits the delivery, sold by him, the buyer will
not receive his shares within the prescribed time. Then the exchange purchases
those short delivery shares through an online auction and gives to the buyer.
for Auction of Shares
The auction of shares is
conducted by the Exchange every day. The timing is
fixed between 2 p.m. to 2.45 p.m. The
participants to auction are members of the Exchange only. To maintain justice,
the members whose clients have defaulted are not allowed to participate in the
auction process. The auction process passes through different procedures. Let
us understand the auction process in brief.
· Determination of Auction
the auction process begins, the Exchange sets the price range for the members
at which they can sell their shares. The upper and lower limit can be 20% of
the previous day closing price. Like for example, GMR Infra closed at Rs. 18 on
the previous day, then auction price can be set between 14.4 and 21.6 where the
members can sell their shares.
· Penalty: It is the duty of the
Exchange to give shares to the buyers. For that, it has to purchase the shares
at whatever price they are offered by the fresh sellers. This can lead to extra
payment by the Exchange to purchase the shares of the sellers. The extra
expenses are to be paid by the person who has defaulted by short delivery. Apart from the extra expenses,
the defaulter also has to bear the penalty of .05% of the value of the stock on per day basis.
· Settlement Process: This is the final process of
auction settlement. The original buyer is given the delivery of shares on the 3rd day
of the transaction i.e. T+3. The general period is T+2 but the Exchange
identifies the shortage and delivers the shares to the buyer on the next day. The Exchange also notifies the members about
the defaulting client and the auction charges charged to him.
A scenario may develop where
the Exchange can have no sellers during the auction process to give shares to
the original buyer. In such case, the
Exchange opts for payment of cash to the original buyer instead of shares. This
situation generally arises when the share is hitting upper circuits and there
are only buyers in the market. This situation is a nightmare for traders having short delivery.
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