What is short delivery and what are its consequences?

Short delivery in the stock market refers to a scenario where a seller fails to deliver the committed shares during settlement. This usually happens if a seller unintentionally sells shares which they do not possess or if a particular stock faces liquidity issues.

How it Unfolds:

Identification and Notification: On T+1 day (a day after the transaction), TradeJini identifies short deliveries and notifies the concerned clients

Auction by Exchange: On T+1 day, an auction is conducted by exchange to secure shares from other potential sellers in the market. 

Delivery to the Buyer: Shares obtained from the auction are delivered to buyers by T+2 day. Buyers can view these shares in their Demat account by T+3.

Penalty on Defaulting Sellers: Sellers unable to deliver the shares face penalties. The penalty is the difference between the auction price and the original close-out rate. If auction rates are lower than the close-out rates, then the difference between these two rates will be deducted from the seller’s account on T+2.

Cash Settlement: If shares are not available during the auction, exchange settles the transaction in cash. The settlement amount is determined by the close-out rate, which is either 20% above or below the closing rate. This amount is credited to the buyer and debited from the seller by T+2 .

Impact on Buyers:

Delayed Delivery: Buyers may experience a delay in receiving shares or might receive a cash settlement.

Missing Corporate Actions: During this period, buyers might miss out on corporate actions like dividends declared by the company.

Impact on Sellers:

Penalty Charges: Sellers face penalties if they cannot deliver the committed shares.

In essence, while buyers may face inconvenience, they do not suffer financial losses. Sellers, however, may encounter penalties and other repercussions.