When does cash settlement occur to close out a short delivery, and what are the implications of a short delivery?
When does cash settlement occur to close out a short delivery, and what are the implications of a short delivery? Find a clear answer in this FAQ by 021 Trade.
Cash settlement occurs on T+2 if the exchange is unable to obtain the short-delivered shares through the auction process. The likelihood of cash settlement depends on the liquidity of the stock. For highly liquid stocks, the probability of cash settlement is low because shares are generally available in the market. However, for illiquid stocks, where availability may be limited, the chances of cash settlement are higher.
Example:
Suppose you buy 1000 shares of Company ABC at ₹50 each, but the shares are not delivered by the seller. On the trade day (T day), ₹50,000 (₹50 × 1000 shares) is debited from your account for the purchase.
The exchange then attempts to obtain the 1000 shares of ABC in the auction market and deliver them to your demat account. If the shares are still not available in the auction, the trade is settled in cash.
If ABC ’s closing price on the auction day is ₹55, the close-out price will be ₹66 (which is 20% higher than ₹55). In this case, the seller who failed to deliver the shares must pay ₹66,000 (₹66 × 1000 shares). This amount includes the ₹50,000 originally received from the sale plus an additional penalty of ₹16,000. As the buyer, you will receive ₹66,000 in your account.
If the stock price reaches a high of ₹75 between the trading day and the auction day, the cash settlement will occur at ₹75 instead of ₹66, since the exchange uses the higher value for settlement.
Cash settlement takes place at the higher of the following two values:
- The auction day’s closing price + 20%.
- The highest price of the stock between the trading day and the auction day.
