How is the Close-Out Price Determined?

In the Indian stock market, trades are expected to be settled on a T+1 basis—meaning shares sold by a trader should be delivered to the exchange the next working day. But in certain cases, especially during short delivery, the seller fails to deliver the shares on time.

If the shares are not delivered on T+1 and the exchange fails to procure them through the auction process, the exchange initiates a Close-out Settlement.

What is a Close-Out in the Stock Market?
A Close-out is a cash settlement mechanism triggered when the exchange is unable to source the undelivered shares through the auction process. Instead of receiving the shares, the buyer is compensated in cash. This ensures the buyer is not left at a loss due to the seller’s delivery failure.

The seller is penalised and bears the cost of this cash settlement.

When Does a Close-Out Occur?
A close-out occurs when:

• The seller fails to deliver the shares on the pay-in day (T+1)
• The shares cannot be procured in the auction market on T+1
• There are no sellers available during the auction session

How is the Close-Out Price Determined?
The close-out price is calculated as the higher of:
1. The highest price of the security recorded on the exchange between the trade day (T) and the auction day (T+1),
OR
2. 20% above the official closing price on the auction day (T+1)

The exact method of determining this price may vary slightly depending on the trading
category of the stock.

Example of a Close-Out Scenario
Let’s say Mr. Ravi buys 1,000 shares of ITC at ₹200 per share on Dec 1 (T).

• The seller fails to deliver the shares.
• The exchange conducts an auction on Dec 2 (T+1) but is unable to procure the shares.
• As a result, a close-out is initiated.

Price Data:

Let’s assume the closing price on Dec 2 (auction day) is ₹209.
So, we calculate the close-out price as follows:

• Highest price from T to T+1: ₹210
• 20% above the closing price on T+1: ₹209 + (20% of ₹209) = ₹250.80

Result:
Since ₹250.80 is higher than ₹210, the close-out price = ₹250.80

Final Settlement

• Quantity: 1,000 shares
• Close-out Price: ₹250.80
• Amount Credited to Buyer (Mr. Ravi): ₹2,50,800 (1,000 × ₹250.80)

This amount is credited to the buyer’s trading account by T+2. The defaulting seller is
debited this amount, acting as a penalty.

Key Points to Remember

• The buyer is fully protected during close-out and receives fair compensation.
• The seller bears all costs associated with short delivery and close-out.
• Close-out rules may differ slightly for specific share categories like T2T (Trade-to-
  Trade) or physical settlement stocks.

To learn more about the close-out procedure, visit the NSE and BSE websites.

For more information, contact RMoney at 0562-4266600 / 0562-7188900 or email us at
askus@rmoneyindia.com