In the equity segment, shares can be sold for delivery only if the shares are available in the demat account of the client. The client needs to transfer the shares to the Exchanges – BSE or NSE on T+2 days. If the client fails to transfer the shares within the stipulated time, such transaction results into default of payin obligation and short delivery of shares.
The buyer of the shares is the rightful acquirer of the shares and the shares needs to be transferred to his account. Since the seller has defaulted in delivery of the shares, the exchange would put the undelivered shares for “Auction”. This Auction will happen on the T+2 day itself.
In the auction session, people who already have shares in the demat account can offer there shares. The auction window time is between 2.00 p.m. to 2.45 p.m. Clients of the broker where the default has happened cannot participate for the auction in the same script. The auction price is taken at the lowest price offered in the auction. The highest price would be not more than 20% and not less than 20% of the closing price of the T+1 day i.e. the previous day prior to settlement day. If the shares are offered, the shares are given to the buyer of the shares on T+3 day. The seller has to pay the price for the shares offered in the auction, which is generally higher than the market price prevailing on the day.
For example above, in an auction of shares of Infosys where the closing price was 1000, fresh seller can offer to sell 100 shares of Infosys in the Auction market in the range of 800 to Rs.1200 (+/- 20% above 1000).
If for some reason the shares are not offered in the auction by any existing shareholder, then the settlement happens at a price known as the close out price or close out rate. The close out price is determined according to the categories of the script. A few different types of close out prices suggested by NSE are as follows:
|Category||Close out price|
|Normal Market||Highest Price between Tday to the auction day or 20% above the closing price on the auction day, whichever is higher|
|“IL” & “BL” Markets||Highest Price between Tday to the auction day or 20% above the closing price on the T+1 day, whichever is higher|
|Trade for Trade Settlement – Deals||Highest Price between Tday to the auction day or 20% above the closing price on the T+1 day, higher of the above, or as declared by the exchange from time to time|
|Failure to give delivery in the auction market||Highest Price between Original Tday to the closing out day or 20% above the closing price on the T+1 day, whichever is higher and will be charged to the defaulted of the auction market unless otherwise specified|
Financial Implications of an Auction
In case of default of shares delivered by a seller, an auction as described would be conducted.
The series of events would be as under:
- T Day – Sale of 1000 Shares Infosys on Monday at Rs. 1000 and Ledger credited by Rs. 10,00,000
- T+2 Day (Morning) – Non – Delivery of 1000 shares on Wednesday
- T+2 Day (Auction Session) – Auction conducted for 1000 shares. The best price on offer in the Auction session was 1050.
- T+2 Day (Post Auction) – Debit Auction Bill generated for 1000 shares at 1050 of Rs. 10,50,000 with an Auction Penalty of 0.05%. Net Ledger on account of the transactions would be Rs. 50,000 + Auction Penalty amount. The 50,000 is nothing but the difference price between auction settlement price and the original sale price.
A detailed series of events in case of short delivery and subsequent auction is explained on the Short Delivery Article.
Additional Reference Links