What is internal shortage handling?
As per exchange regulations, cases of trade defaults where both the buyer and seller are clients of the same broker will have to be settled through the broker's internal shortage settlement procedure. Internal shortage handling in Geojit is carried out as a voluntary auction (wherever possible), or the position is squared off as per exchange norms i.e., a close-out settlement.
For example, Mr Ram and Mr Hari are both clients of Geojit. On Monday, Mr Ram buys 100 shares of Cipla as a delivery trade and Mr Hari sells 100 shares of the same. At the end of the day, Mr Hari fails to provide the shares he sold, resulting in short delivery. This situation will be handled as a:
1. Voluntary Auction- An auction will be conducted where Geojit will purchase 100 shares of Cipla on Tuesday (T+1) i.e., the auction day, in order to deliver them to Mr Ram's demat account.
The equivalent amount will be charged to Mr Hari on his delivery default.
Assuming the price on Tuesday to be Rs. 1100 per share, the total trade value of Rs. 1,10,000 will be debited from Mr Hari's account and Mr Ram will receive 100 shares (from the auction) in his Demat account.
2. Close-out settlement- In case Geojit is unable to buy the required shares due to low liquidity or the share hitting its upper circuit, etc., the trade will be settled through the close-out procedure on T+2. Here, Mr Hari will be charged, and Mr Ram will receive the higher of:
- The highest price recorded in that scrip on the exchange from the trade day (T, Monday) till the auction day (T+1, Tuesday), OR
- 20% above the official closing price on the auction day.
Geojit reserves the right to alter its internal shortage procedure from time to time, as per guidelines published by the exchanges or regulators.