What does short delivery mean and how does it impact me?
Short delivery is a situation in the stock market when a seller doesn't deliver the promised shares to the buyer within the stipulated time. This typically occurs when a seller mistakenly sells shares without possessing them or if a particular stock is illiquid.
Here’s a breakdown of the sequence and its implications:
Identification and Notification: On T+1 day (a day post the transaction), the exchange recognises such short deliveries and sends out notifications to both buyers and sellers.
Auction by Exchange: On T+1 day, the exchange organises an auction to procure the shares from other potential sellers in the market. The auction price is rooted in the stock's closing rate on the trading day, with a ceiling of 20% above or below this rate.
Delivery to the Buyer: Shares obtained from the auction are given to the buyers by T+2 day. As a buyer, you'll spot these shares in your Demat account by T+3.
Penalty on Defaulting Sellers: Sellers who couldn't deliver the shares are penalised. This fine is the difference between the auction price and the original selling rate. If auction rates are lower than the close-out, the latter is employed. This amount is deducted from the seller’s account on T+2.
Cash Settlement: If shares aren’t obtainable during the auction, the exchange settles the transaction in cash. The close-out rate, which is either 20% above or below the closing rate, determines this settlement. This amount is credited to the buyer and debited from the seller by T+2.
Impact on Buyers:
Delayed Delivery: There could be a delay in obtaining your shares, or you might receive a cash settlement instead.
Missing Corporate Actions: If the company declares dividends or undergoes other corporate actions during this window, you might not benefit.
Impact on Sellers:
Penalty Charges: Sellers are subjected to penalties if they can't deliver the promised shares.
Potential Legal Actions: If sellers fail to address the penalty or close-out sums, they might face legal consequences.
In essence, while buyers might experience some inconvenience, they don't bear any financial loss. Sellers, however, might face penalties and other repercussions.
To understand how to avoid short delivery, refer to this article.
Related Articles
How to avoid short delivery?
To avoid short delivery, one needs to be cautious and have a clear understanding of one's holdings and the market environment. Here's how you can steer clear of such situations: Verify Your Holdings: Before selling any shares, ensure that the exact ...
What is short selling?
Short selling is a trading strategy where you borrow and sell a security you don't own, hoping to repurchase it later at a lower price, profiting from the price difference. For instance, if you borrow 100 shares of a company at ₹550 each, you'd ...
What happens if my intraday equity short position isn't closed by end of day?
When you engage in intraday equity trading, it's crucial to understand the implications if short positions aren't squared off by the day's close. Understanding Short Delivery: In instances where your intraday equity short position remains unsquared ...
What penalties does a seller face for short delivery of shares?
If a seller is unable to deliver the promised shares, they will be charged the difference between the auction's settlement price and their original selling price. Furthermore, an auction penalty of 0.05% per day is levied for each day the shares ...
Can I short futures contracts without owning the underlying shares?
Absolutely. With FYERS, you can short futures contracts without the need to hold the underlying shares. This is because futures contracts are settled in cash, eliminating the requirement for physical possession of the securities in your Demat ...