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.
Let us now understand the meaning of short delivery.
Meaning 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 shares.
What 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.
Procedure 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 Price:Before 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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