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What is Short Delivery and Auction Settlement in the Stock Market?

Post Date : May 22, 2025

In the Indian stock market, every trade follows a settlement cycle where funds and securities must be delivered by the broker to the exchange on the T+1 day (i.e., one working day after the trade execution). This delivery process is called the pay-in.

But what happens if the seller does not actually own the shares or fails to deliver them on time?
This situation is termed a Short Delivery.

What is Short Delivery?
A short delivery occurs when a seller fails to deliver the shares they sold by the scheduled pay-in time. This is common in cases like BTST (Buy Today Sell Tomorrow) where shares are sold before they are received in the demat account, or if the seller doesn’t have the required quantity
in their demat account.

In such cases, the buyer doesn’t receive the shares, and the exchange initiates an Auction process on T+1 day to source the undelivered shares and ensure timely delivery to the buyer.

Auction Process for Short Delivery

Auction Timing:
Auctions are held daily between 2:00 p.m. and 2:45 p.m. Traders holding the required stock can offer their shares during this window. However, to avoid any conflict of interest, the broker whose client has defaulted is not allowed to participate.

Auction Price Band:
The price range for auction is ±20% of the stock’s closing price on T (trade day). The final auction price is usually the lowest price at which shares are offered during the session.

Valuation Price & Valuation Debit:

• Valuation Price: This is the closing price of the stock on T day.
• Valuation Debit: The exchange blocks an amount in the broker’s account equivalent to (Valuation Price × Quantity of shares short delivered). This acts as a provisional penalty for default.

What Happens Post-Auction?

Scenario 1 – Auction at a Price Higher than Valuation Price

Let’s say the shares are auctioned at ₹2,200 while the Valuation Price was ₹2,100. The broker will be debited an additional ₹100 per share (₹2,200 – ₹2,100), which is borne by the defaulting client. The shares are delivered to the buyer by T+2.

Scenario 2 – Auction at a Price Lower than Valuation Price

If the shares are bought at ₹1,900, the buyer still receives the shares. However, the broker is charged ₹2,100 per share (Valuation Price), and the ₹200 difference goes to the Investor Protection Fund (IPF).

Scenario 3 – No Sellers in Auction Market (Close-Out)

If the exchange fails to source shares in the auction, it conducts a Close-out. This means the buyer is compensated in cash instead of shares. The close-out price is the higher of:

• The highest price between T and T+1, or
• 20% above the closing price on T

Scenario 4 – Short Delivery in T2T Segment

For stocks in the Trade-to-Trade (T2T) category, short deliveries are directly cash settled.
The close-out price is either:

• The highest price between T and T+1, or
• 20% above the T day closing price—whichever is higher.

Scenario 5 – Internal Settlement

If both the buyer and seller belong to the same brokerage, the broker may resolve the short delivery internally according to their own policy.

Example to Understand Short Delivery Better

Mr. Abhiraj short sells 10 shares of Titan Ltd at ₹2,000 on Monday (T) but fails to square off the position.

• Closing price on T: ₹2,100 (Valuation Price)
• Valuation Debit = ₹2,100 × 10 = ₹21,000
• On Tuesday (T+1), the exchange holds an auction where the price band is ₹1,680 to ₹2,520.

Now, three things could happen:

• Auction price = ₹2,200: Abhiraj pays ₹100 extra per share (₹1,000 total).
• Auction price = ₹1,900: ₹200 per share goes to IPF; Abhiraj still pays ₹2,100.
• No sellers: Exchange cash-settles the trade, paying buyer a higher close-out amount.

Additional Notes:

• Physical settlement of derivatives involves auction on T+3 and final settlement on T+4 if there’s a delivery default.
• Clients are not allowed to participate in auction sessions.
• Visit the NSE or BSE Website to learn more about auction and settlement rules.

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