When does cash settlement happen to close out short delivery?

Cash settlement to the trading account usually happens on T+2 day if the exchange is unable to obtain the shares in the auction. The probability of cash settlement is lower for liquid stocks and higher for illiquid stocks. To learn more about short delivery, see What is short delivery and what are its consequences?

Did you know? The price at which the transaction is settled to the trading account, known as the close-out price, is generally over 20% higher than the stock's settlement price on auction day. This amount can be used to purchase the stocks again once the cash has been credited to the trading account.

Example scenario

1. 100 shares of Oriental Trimex are bought at ₹15 per share, which are short-delivered.
2. The exchange tries to find sellers who can deliver 100 shares of Oriental Trimex in the auction market to deliver to the client’s demat account.
3. The trade gets cash settled if there are no sellers in the auction market.
4. If the settlement price of Oriental Trimex on the auction date was ₹18, the exchange cash settles the trade at ₹21.6 (20% higher than 18).
5. The seller who defaulted pays ₹2160 (21.6 * 100 shares), and the buyer receives ₹2160.
   
6. If the price of Oriental Trimex reaches ₹25 from the day of trading till the auction day, then the cash settlement is done at ₹25 instead of ₹21.6.

This is because cash settlement always happens at whichever is higher of the following:

• The settlement price on auction day + 20%.
• The highest price of the stock from trading day till the auction date.

In the event of short delivery of AAA and above-rated bonds or debentures, the closing price will be the greater of the highest exchange rate from the start of the trading period to the close-out day, or 5% above the auction day's official closing price. For bonds and debentures rated below AAA, a 20% close-out markup is applied.

For stocks in the T2T category, no auction takes place. Shortages in T2T stocks are directly closed out during settlement at the higher of the two: the highest price on T day across exchanges or 20% above the settlement price on T day. To learn more, see zerodha.com/z-connect/queries/stock-and-fo-queries/consequences-of-short-delivery-nse-bse.