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What is Short Delivery and What Are Its Consequences?

Post Date : May 15, 2025

In the stock market, short delivery refers to a situation where the seller fails to deliver the shares to the exchange by the settlement date. This typically occurs due to issues like illiquidity, stocks hitting the upper circuit, or failure to square off intraday short positions.

Let’s understand how short delivery impacts both the buyer and the seller, along with its process and penalties.

What Causes Short Delivery?
Short delivery usually happens when:

• A trader sells shares without holding them (as in intraday or short-sell orders) and fails to buy them back due to lack of liquidity.
• The stock hits the upper circuit, preventing further buying to cover the short position.

When Will the Shares Be Credited?
If short delivery occurs, the exchange conducts an auction on T+1 day (next trading day) to procure the shares. If successful, the shares are credited to the buyer’s demat account on T+2 day. In case the auction fails, the buyer receives a cash settlement based on a close-out price.

Example Timeline:

Consequences for the Seller

❌ What Happens if the Seller Defaults?
If the seller fails to deliver the shares:

• The exchange holds an auction on T+1 to procure the short quantity from other market participants.
• The seller must compensate for the price difference if the auction price is higher than the original selling price.
• An auction penalty is also levied along with applicable GST.

  Auction Price Band:
  The auction price range is determined using the T day closing price, with a ±20% limit.

  Example Scenario:
  1. Seller sells 100 shares at ₹800 on Monday (T day).
  2. Stock hits upper circuit – trade can’t be settled.
  3. Auction is conducted on Tuesday (T+1), with the closing price of Monday used (e.g., ₹830).
  4. Auction price is ₹920.
  5. Seller must pay the difference: (₹920 – ₹800) × 100 = ₹12,000
  6. Auction Penalty Calculation:

o Valuation Debit: ₹830 × 100 = ₹83,000
o Penalty @0.05%: ₹41.50
o GST @18% on penalty: ₹7.47
o Total = ₹48.97

If the auction price is lower than the closing price, the closing price is still used to calculate penalties, and the difference is credited to the Investor Protection Fund.

Conclusion
Short delivery is a serious compliance issue in equity trading. It not only causes delays and uncertainties for the buyer but also leads to financial penalties for the seller. Traders, especially those using intraday strategies or short-selling, must always ensure they can fulfill their trades to avoid being penalized.

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