Auction Timing & Participants
The auction is conducted every day between 2:00 pm and 2:45 pm. Only member brokers of the exchange can participate and sell shares which are short delivered. To avoid any conflict of interest the exchange doesn’t allow members whose client has defaulted (short delivered) to take part in auction.
The auction price
The exchange does not specify the price at which the auction will take place but will allow auction participants to sell shares within a pre-specified range.
Upper limit of the range: 20% higher than the closing price of the share on the day prior (T+1, Wednesday) to the day of auction. If the closing price of ACC on T+1 was 1100 then the upper limit will be 1100+ (1100*20%) =1320
Lower limit of the range: 20% lower than the closing price of the share on the day prior to the day of auction. i.e. 1100-(1100*20%)=880 .
Thus an auction participant can offer to sell 100 shares of ACC in the price range of 880 to 1320.
In case of short delivery, an additional 0.5% penalty shall be levied towards auction penalty.
Few more terminologies
Before we proceed further let us understand the concept the Valuation price & Valuation debit.
Valuation Price: Is the closing Price of the share not delivered on T+1 day. In our example it is Rs.1100
Valuation Debit: Closing Price of the share not delivered on T+1 day x No. of shares not delivered. i.e 1100 x 100=1,10,000
An amount equivalent to valuation debit is blocked by the exchange from the client’s account when shares are not delivered on T+2.
On Auction Day
Case I: Share price went up
Assume in the Auction market a fresh seller is offering to sell 100 ACC shares @ Rs.1150. The Exchange buys the shares @ Rs.1150 & gives the shares to the Buyer. Since there has been a default from the seller’s end the difference between auction price (1150) & valuation price (1100) of Rs.50 will have to be paid by the seller.
Hence the total amount debited will be= Selling price -[Valuation debit + ( (auction price x quantity)-valuation debit)]
= 1,05,000 – [1,10,000 +( 1,15,000 – 1,10,000)]
Case II: Share price dropped
Assume after you sold the share of ACC @ Rs.1050 the price of ACC dropped and closed at 1000/- on (T+1, Wednesday). The valuation debit that would be debited from the brokerage’s (client’s) account will be Rs.1, 00,000/-.
On the auction day (T+ 2) if the auction buy price is Rs 980. The client won’t get the benefit of lower auction price as the exchange wants to discourage short delivery. The price debited by the exchange will be the higher of valuation debit or the price at which the stock has been bought in auction. Hence the amount debited from the client’s account will be Rs.1, 00,000 and the difference of Rs.5000 between the auction price & valuation price will be transferred to the Investor Protection Fund.
Case III: Close-out
All shortages not bought are deemed closed-out and are cash settled on the basis of close out rate. Close out will be at the highest price prevailing in the exchange from the day of trading till the auction day or 20% above the official closing price on the auction day, whichever is higher.
Case IV: Share falls in Trade for Trade (T2T) segment
Any shortages in TFT-S (Trade-for-trade) will be directly closed-out on the settlement at the highest price prevailing in the Exchange from the day of trading till the T+1 day or 20% above the official closing price on the T+1 day, whichever is higher, or as declared from time to time.
Case V: Internal Short Settlement
Internal Short Settlement is a special case when both the buyer and the seller belong to the same broker. Please visit out Internal Short Settlement article to learn more about the process followed for the same.