When a short delivery of shares occurs and the exchange is unable to locate fresh sellers in the auction market, the transaction is considered closed out. In such cases, instead of delivering the shares to the buyer, the exchange settles the transaction in cash based on the close-out rate.
The close-out rate is determined as the higher of the following:

• The highest price of the stock between the trading day and the auction day, or
• 20% above the official closing price on the auction day.

This cash settlement amount is passed on to the buyer as compensation for the non-delivery of the shares.

Example to Understand the Close-Out Mechanism

Suppose:

• You purchased 100 shares of TATA Motors at ₹500 each.
• These shares were short delivered, meaning you do not receive them on T+1 (settlement day).

The exchange will conduct an auction to try and find fresh sellers for these shares. If no sellers are found, the transaction will be closed out in cash.
Now, if the official settlement price of TATA Motors on the auction day is ₹600, the close-out price will be:

• ₹720 (₹600 + 20%)

The defaulting seller must bear the auction penalty:

• Penalty = (₹720 – ₹600) × 100 shares = ₹12,000

Thus, the buyer will receive a total of ₹72,000:

• ₹60,000 (based on the settlement price)
• ₹12,000 (as compensation)

What If the Price Hits a New High?
If the stock price of TATA Motors had touched ₹760 between the trading and auction days, the close-out would be made at ₹760 instead of ₹720, because ₹760 is higher.

Internal Shortages
This close-out process also applies to internal shortages within brokers.
For more information, refer to the NSE and BSE shortage handling guidelines:

• NSE Shortage Handling Procedure
• BSE Shortage Handling Procedure

Close-Out Due to Corporate Actions
When an auction payout cannot be completed before the record date or book closure, the close-out is done at the higher of:

• The highest price across exchanges from the trading day to auction day, or
• 10% above the settlement price on the auction day or as per the guidelines declared from time to time by the exchange.

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