Let us take a look at a few scenarios with an example.
Scenario 1: Stock hits an upper circuit
You have short sold 100 shares of ACC in intraday (Product code MIS) expecting the price of ACC to come down during the trading day and make a profit. However during the day news broke out that ACC has won a huge contract for GOI and the share price went up steeply and hit the upper circuit (when a stock hits upper circuit there are no sellers). To close your position as a short seller you will have to buy 100 shares of ACC. Buying will not be possible unless the circuit is released. Assuming the circuit is not released during the day, you will be forced to hold your short position.
Since the short position could not be closed during the trading day, you will have to deliver 100 shares to the buyer on T+2, failing which the shares would be considered short delivered.
Note: Circuit filters are not applicable on scrips trading in the FNO segment. Hence the above scenario won’t arise in case of ACC but can happen with stocks that don’t trade in Futures & Options.
Scenario 2: Buy Today Sell Tomorrow (BTST)
You have bought 100 shares of ACC @ Rs.1000/share (with product code CNC) on Monday, expecting the stock price to rise in the short term. As per your expectation the stock price increases to Rs 1050 the next trading day (Tuesday). To make a quick profit you sell the 100 shares of ACC @ Rs.1050, thereby earning a profit of Rs. (1050-1000)*100=5,000.
Ideally it should be a smooth transaction as per the Rolling Settlement Cycle. 100 shares of ACC bought by you on Monday will be received in your Demat account on Wednesday & your broker will pass on this 100 shares received in your Demat account for pay-in to the exchange on Thursday.
Monday: You bought 100 shares
Tuesday: You sold 100 shares
Wednesday: 100 shares received in your Demat account
Thursday: 100 shares sent by the broker from your Demat account to the exchange for pay-in.
The completion of the entire settlement cycle depends on the premise that you will receive the entire quantity of 100 shares in your Demat account on Wednesday. However, there is a possibility that the person who sold you shares on Monday fails to deliver the shares (Scenario 1). In that case you won’t receive any shares in your Demat account on Wednesday. As a result your broker will have no shares for pay-in to the exchange on Thursday and there will be a short delivery of 100 shares.
What is Short Selling of shares?
What happens in case of Short Delivery?
How does the auction process work in case of short delivery?
If I sold 100 shares but I have only 50 shares in my Demat holding then how auction will be considered?
The Exchange doesn’t specify the price at which the auction will take place. Generally, the maximum auction penalty can be of Rs.20% higher than the closing price of the share on the day prior (T+1) to the day of auction. For e.g. If the closing price of ABC scrip on T+1 was 100 then the upper limit for an auction will be 120(100*20%). Please click here to know more on auction settlement. You shall receive the contract note for Auction settlement today.
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