A person investing in the stock market for long term or short termpurchases the shares and sells them at a later period. In such scenario, the person buying the shares has totake the delivery of the shares in his demataccount. The concept of delivery is purchasing today and selling it off on a later date.
However, if the trader purchases and sells the shares onthe same day then in such scenario there is no need for delivery of shares asthe transaction is settled on the same day i.e. intraday.
The equity segment in Indiaoperates on T+2 day basis i.e. if you buy the shares on Monday, you will receiveits delivery on Wednesday. Similarly, if you sell the shares on Monday you areliable to give the delivery of shares to the Exchange by Wednesday.
Let us understand the conceptof delivery with a practical example:
Suppose you purchased 5,000shares of GMR Infra on Monday which you are going to hold for the long term. In such case, you will receive the shares in your demat account on Wednesday i.e. T+2 day.
Letus now understand the meaning of short delivery.
Meaningof Short Delivery
The concept of short deliveryis different from the delivery you take while purchasing the share. When atrader takes a short intraday position by selling the shares, he is obliged tocover his position by purchasing those shares on that day itself. However, onfailing to do so for whatsoever reason his trade position will reflect selling ofshares without any delivery in hand. Such delivery position of shares is termedas short delivery.
In case you are alreadyholding the delivery of shares, you are liable to give the delivery of shareswithin two days of selling it, whereas in the caseof short delivery this is not possible as you do not have any shares in demat account to cover the short sell. In such scenario, you would end up defaulting on shortdelivery. This will lead to auction ofshares.
Whatis Auction of Shares?
It is the duty of the Exchangeto ensure that the buyer will receive the delivery of the shares from theseller of the shares in T+2 settlement period. If the seller fails to fulfilhis delivery obligation and not deposits the delivery, sold by him, the buyer willnot receive his shares within the prescribed time. Then the exchange purchasesthose short delivery shares through an online auction and gives to the buyer.
Procedurefor Auction of Shares
The auction of shares isconducted by the Exchange every day. The timing isfixed between 2 p.m. to 2.45 p.m. Theparticipants to auction are members of the Exchange only. To maintain justice,the members whose clients have defaulted are not allowed to participate in theauction process. The auction process passes through different procedures. Letus understand the auction process in brief.
·Determination of AuctionPrice: Beforethe auction process begins, the Exchange sets the price range for the membersat which they can sell their shares. The upper and lower limit can be 20% ofthe previous day closing price. Like for example, GMR Infra closed at Rs. 18 onthe previous day, then auction price can be set between 14.4 and 21.6 where themembers can sell their shares.
·Penalty: It is the duty of theExchange to give shares to the buyers. For that, it has to purchase the sharesat whatever price they are offered by the fresh sellers. This can lead to extrapayment by the Exchange to purchase the shares of the sellers. The extraexpenses are to be paid by the person who has defaulted by short delivery. Apart from the extra expenses,the defaulter also has to bear the penalty of .05% of the value of the stock on per day basis.
·Settlement Process: This is the final process ofauction settlement. The original buyer is given the delivery of shares on the 3rd dayof the transaction i.e. T+3. The general period is T+2 but the Exchangeidentifies the shortage and delivers the shares to the buyer on the next day. The Exchange also notifies the members aboutthe defaulting client and the auction charges charged to him.
A scenario may develop wherethe Exchange can have no sellers during the auction process to give shares tothe original buyer. In such case, theExchange opts for payment of cash to the original buyer instead of shares. Thissituation generally arises when the share is hitting upper circuits and thereare only buyers in the market. This situation is a nightmare for traders having short delivery.
Indira Securities is a onestop solution for all your financial service needs that includes trading instocks, commodities, derivatives andcurrency. With our technical tools for stock analysis and stock market analysistools, we help our clients to make higher profits. We guide the investors on howto invest in the stock market. Weprovide our clients with right stock market risk management strategy and giveregular stock market recommendations. Opena demat account with us and enjoy our personalised services. For any query or information, you can contact us via phone andemail. We will be glad to serve you.
