What is an Auction?
In the Indian share market, an auction happens when there’s a short delivery; i.e., a seller fails to deliver shares they sold by the settlement date (T+1). To resolve this, the exchange (NSE/BSE) holds an auction session to buy those undelivered shares from the market and deliver them to the buyer.
What is short delivery?
Short delivery, also known as delivery shortage, occurs when the buyer does not receive the shares in their demat account because the seller failed to transfer them after the trade was executed.
Angel One informs buyers about short delivery incidents via email, SMS and nudge.
How does the Auction Process Work?
- Auction Day: Takes place on T+2 (2 business days after trade date). The auction usually takes place after 2:30 PM and lasts only 30 minutes.
- Exchange Role:
- The NSE/BSE invites offers from market participants to sell the short-delivered shares.
- These participants quote prices to sell those shares.
- Price Band:
- The auction has a circuit limit: Typically, between 20% below to 20% above the closing price of the stock on T+1. Example: If the stock closes at ₹100 on T+1, auction bids can range from ₹80 to ₹120.
- Settlement:
- If the auction is successful, the shares are bought and delivered to the original buyer.
- The defaulting seller pays the difference between the original sale price and the auction price, along with penalties.
- If Auction Fails:
- The exchange closes the position at the close-out price: Usually, the highest price of the stock from T to T+2 or 20% above the T+1 price, whichever is higher.
- The buyer gets cash compensation, not shares.
Please note that only shares (settled shares) that are already credited to your demat account can be sold during the auction. T1 holdings (shares bought but not yet settled) are not eligible for sale. Additionally, investors cannot buy shares in the auction, as the exchange acts as the sole buyer in this process.
When will the shares be credited after a short delivery?
The buyer’s demat account will receive the shares on T+2 day, following the exchange’s auction on T+1 day to recover the short-delivered quantity. The portfolio reflects the update on the T+3 day.
In case the exchange is unable to source the shares during the auction, the buyer’s Angel One account will be compensated with a cash credit based on the close-out price.
Example Scenario
Shares are purchased on Monday (T day) and are tagged as an unsettled quantity.
If the shares were not delivered on Tuesday (T+1 day), the user will see a nudge on the equity screen on Wednesday (T+2 day).
The exchange delivers the shares procured from the auction market held on Tuesday (T+1 day) and delivers them on Wednesday (T+2 day). The shares will be visible on Angel One from Thursday (T+3 day).
In case there is a settlement holiday on the T+3 day, shares will be reflected on the T+4 day.
What happens when a seller fails to deliver shares?
If a seller defaults on delivering shares, the exchange steps in to manage the shortfall by organising an auction to source the required quantity from other market participants. This process ensures that the buyer receives the shares despite the default. The auction is held on the next trading day (T+1), and the price range for bidding is set based on the closing price of the trade day (T day), with an upper and lower limit of ±20%.
The shares acquired through the auction are delivered to the buyer’s demat account on T+2 (usually Wednesday if the trade was on Monday). Meanwhile, the defaulting seller is issued an auction note and must bear the financial consequences of the short delivery, including paying the price difference and penalties.
Example:
Imagine a seller sells 150 shares on Tuesday (T day) at ₹600 each. On the same day, the stock hits its upper circuit limit, and no sellers are available to fulfil the transaction, resulting in a delivery failure.
The exchange conducts an auction on Wednesday (T+1) to acquire the 150 shares. Suppose the closing price on Tuesday was ₹640. The auction price band will therefore be set between ₹512 and ₹768 (i.e., ±20% of ₹640).
Assume that during the auction, the shares are procured at ₹700.
Now, the seller must compensate for the price difference:
- Difference to be paid = (₹700 – ₹600) × 150 shares = ₹15,000
Additionally, the Clearing Corporation imposes an auction penalty of 0.05% on the valuation debit (along with 18% GST on the penalty amount), which is calculated using the closing price on T day:
- Valuation debit = ₹640 × 150 = ₹96,000
- Penalty = 0.05% of ₹96,000 = ₹48
- GST @18% on the penalty = ₹8.64
- Total penalty charge = ₹48 + ₹8.64 = ₹56.64
In this scenario, the defaulting seller must pay ₹15,056.64 in total due to the auction- ₹15,000 for the price difference and ₹56.64 as penalty charges.
