Short Delivery Explained
In the equity segment whenever a share is bought or sold, and not squared off on the same day (i.e. non-intraday trades), such transactions result into delivery transactions. This means that if the shares are bought, the client needs to pay the full amount and take the delivery of shares in his demat account. Similarly, if the shares are sold for delivery, the client has to give the shares to the exchanges to be transferred to the corresponding buyer. If the seller fails to deliver the shares (whether partially or fully), it is known as "Short Delivery of Shares".
Stock markets in India operate on T+2 rolling settlement cycle. Simply put, shares bought on Monday (T day) are settled on Wednesday (T + 2 day). Shares sold on Monday (T day) are to be settled/delivered on Wednesday (T + 2 day). Investors can withdraw funds only on settlement date and not sale date.Suppose, a person short sells 100 shares of Reliance Industries. However, he does not have those shares in his demat account and would not be able to give the shares to the corresponding buyer. Since the other party is an authentic buyer and willing to pay for the shares, he is entitled to those shares. Thus, the exchange being a counter party guaranteeing the trades, will conduct an auction of the short delivery shares where a third party via a auction bid will make up for the shortfall in the shares delivered and the original short seller who has defaulted on his delivery obligation will have to bear the extra expenses for selling the shares without owning them. The Exchange Auction is conducted on the T+2 days however, the pending shares are delivered only on T+3 days.At SAMCO, to avoid the auction and its associated charges, short selling without having the shares is not allowed for the delivery under the product type CNC. However, in certain BTST transactions as explained below, the auction risk due to short delivery may open up.FAQ's on short delivery
- Which kind of buyers can receive short delivery of shares?
- Any one can be a victim of short delivery of shares in case of default by the selling party. The short delivery of shares for a buyer is usually random and pro rata.
- What's the risk in case of short delivery?
- For an Investor who wishes to hold shares for a long time - In a short delivery, the shortfall in the number of shares received is usually made up on T+3 day latest with no financial implication for the original buyer (except in cases of close out of shares). So in case of an investor, they can be reasonably assured of delivery on T+3 day if not T+2 since the auction process of the exchanges will make up for the short fall of shares received.
- For BTST Traders - There could be risks for BTST traders due to the short delivery process with potential risk of auction of unsettled shares sold on T+1 day. Lets take an example. Let's say you were the buyer of the Reliance shares above for 100 shares on Monday and you sold them on Tuesday as a BTST trade and you were a victim of short delivery process, the following would happen
- Monday - Buy 100 shares Reliance in CNC Product
- Tuesday Beginning of Day - 100 Shares Reliance would appear as Unsettled T1 holdings in the SAMCO Online Trading Platforms
- Tuesday During the Day - 100 shares Reliance in available T1 holdings sold in CNC product
- Wednesday Beginning of Day - 0 shares Reliance would appear as Unsettled T1 holdings (100 shares of Monday Purchase - 100 shares of Tuesday Sale = Net 0)
- Wednesday Mid Day - Scheduled delivery receipt of the 100 shares of Reliance bought on Monday. However, due to a short delivery only 12 shares are received and a short delivery of 88 shares.
- Wednesday Mid Day - Exchange initiates an auction of 88 shares of Reliance in the Auction window. Usually market participants via a bidding process would offer these shares to the exchanges. However, in remote circumstances, it may be possible that no one offers these shares and therefore the auction fails resulting in a close out. In case of a close out, a Credit bill with the close rate will be credited to your ledger account and no shares shall be received on T+3.
- Wednesday during the Day - 12 shares received transferred to your Demat account
- End of Day Status on Wednesday
- Reliance Shares Held in DEMAT Account = (+12)
- Unsettled Obligation of Reliance Shares = (-100)
- Net Share Holdings of Reliance Shares on Wednesday EOD = (-88)
- Thursday Beginning of Day - 12 shares Reliance would appear as Demat holdings and -100 would appear as Unsettled T1 holdings (100 shares of Tuesday Sale)
- Thursday Mid Day - Default in Share Payin obligation - Pay in obligation of 100 shares Reliance is not fulfilled since only 12 shares are available and 88 shares are not delivered by you to the exchanges.
- Thursday Mid Day - Auction shares in quantity 88 received from the exchanges.
- Thursday Mid Day - Auction bill generated debiting Ledger account for Auction purchase of 88 shares short delivered by you on account of Tuesday's share sale obligation.
- End of Day Status on Thursday
- Reliance Shares Held in DEMAT Account = (+88)
- Auction Bill debited on Thursday in Ledger on account of purchase of 88 defaulted shares along with auction charges and related expenses