If the exchange cannot obtain shares in the auction to cover a short delivery, it credits cash to your trading account instead. This usually happens on T+2 day. Cash settlements are less likely for liquid stocks and more likely for illiquid ones.
How the exchange calculates your cash settlement
Your cash settlement is always the higher of:
- Settlement price on auction day + 20%
- The highest price of the stock from the trading day until the auction date
Special scenarios
Trade-for-trade (T2T) scrips
For T2T scrips, the exchange does not conduct an auction. Instead, it settles shortages through closeout at the higher of:
- The highest price on T day across all exchanges, or
- 20% above the settlement price on T day.
Securities under corporate action
For scrips that cannot be auctioned due to a corporate action, the exchange compulsorily closes out the position at the higher of:
- 10% above the official settlement price on the auction day, or
- The highest traded price from the first trading day of the settlement until the auction day.
Closeout for bonds
- AAA and above-rated bonds or debentures: the closeout price is the higher of the highest exchange rate from the start of the trading period to the closeout day, or 5% above the auction day's official settlement price.
- Bonds and debentures rated below AAA: a 20% closeout markup applies.
Closeout price for unsuccessful shortages
As per the exchange circular, if the exchange cannot buy all the required shares in an auction, it uses a Weighted Average Price (WAP) for auction settlement.
Example scenario
There is a shortage of 1,000 shares. The exchange tries to buy them in an auction, but only finds some:
- 800 shares are bought at ₹100 (Auction Price).
- 200 shares could not be bought, so they are closed out at ₹120 (Closeout Price).
How the exchange calculates the Weighted Average Price (WAP)
Instead of charging two different prices, the exchange blends them into one:
- (800 shares × ₹100) + (200 shares × ₹120) = ₹1,04,000 (Total Cost).
- ₹1,04,000 ÷ 1,000 shares = ₹104 per share (Weighted Average Price).
The final settlement
- For you as the seller: you are debited a flat rate of ₹104 per share for the entire 1,000 shares (Total: ₹1,04,000).
- For the buyer: they receive the 800 shares that were bought, plus a cash credit of ₹120 per share for the 200 shares that were not available in the auction.
If no shares are purchased in the auction, the closeout price (₹120) applies to the full 1,000 shares for both the buyer and the seller.