What happens if I am unable to deliver the shares sold by me?
Defaults on sell transactions will result in a short delivery of shares. As a result, the buyer in this transaction will not receive his purchased shares, and the exchange will conduct an auction (for these undelivered shares). In situations of payment or delivery failure by the pay-in day, losses and costs are borne by the defaulting party.
If the auction is successful, the seller will have to pay the actual auction price plus the applicable brokerage and/or penalties, and the shares will be delivered to the buyer by T+2. In case there are no sellers for the auction, settlement will be at the close-out price based on the trading category of the concerned share.
For example, Mr Abhiraj short sells 10 shares of Titan Ltd at Rs. 2,000 per share on Monday (T) as an intraday position and fails to close it.
- Geojit is expected to deliver these shares to the exchange on the pay-in day for the trade i.e., Tuesday (T+1), but will not be able to do so due to Abhiraj's delivery default. As a result, the exchange will block a certain amount of money in Geojit's account, a.k.a., the Valuation Debit. This amount is determined based on the closing price of the share on Monday (T)- let us take the closing price on Monday to be Rs. 2,100 (a.k.a., the Valuation Price).
- With a Valuation Price of Rs. 2,100 per share, the Valuation Debit is Rs. 21,000 (2,100 * 10 shares).
- On Tuesday the exchange will conduct an auction to purchase shares so as to deliver them to the actual buyer. The auction price will be allowed to range 20% below and above the Valuation Price of Rs. 2,100 i.e., Rs. 1,680 and Rs. 2,520.
If there are no sellers in the auction market, the exchange conducts a 'Close-out' based on the trading category of the concerned share. This results in the trade being cash settled, wherein the buyer receives a payment (instead of the due shares), and the defaulting seller will be charged for the same.
Learn more about short delivery and auctions.
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