Trading in the stock market is just like shopping online where you pick a stock, pay the money, and wait for it to reach your account. But sometimes, the stock you bought does not arrive on time in your account. This situation is called a short delivery.
If you want to know what is delivery in share market, it is the simple process where shares move from the seller’s account to the buyer’s account. When you buy shares to keep for a few days or years, it is called delivery in stock market trading. Usually, this happens smoothly. But if the seller does not have the shares they sold, a mistake happens in the delivery in share market process.
Beginners must understand this because it explains why your shares might be missing and how the stock exchange protects your money.
Short Delivery in the Stock Market
To put it simply, short delivery is a “delivery failure.” It happens when the person who sold you the shares fails to give them to the exchange on time. A short delivery means the seller sold shares they did not actually have in their account.
This is a type of settlement shortfall which tells us that the clearing corporation did not receive the shares from the sellers account within a designated time on the settlement day. Here the clearing corporation is unable to credit the buyer’s demat account on the other hand buyer’s funds are transferred to the clearing house where the assets are shown missing which leads to flag the transaction as default.
Because they don’t have the shares, the exchange cannot move them to your account. The trade is still valid, but the shares are “short” or missing.
When Does Short Delivery Occur?
It generally takes place during the pay-in-process, where brokers transfer the securities sold by their clients to clearing corporations. If the broker does not have shares in his pool then shortage is identified. This can happen in following ways:
- The seller sold shares that were not yet settled in their account (BTST trades).
- The seller initiated an intraday short position but was unable to buy the shares back due to a lack of liquidity or the stock hitting an upper circuit.
- The shares in the seller’s account were pledged or under a legal lien, making them ineligible for transfer.
Key Terms You Should Know
- Seller: The person who sells the shares and is responsible for sending them.
- Buyer: The person who pays money and expects to get shares in their account.
- Settlement: The final step where money goes to the seller and shares go to the buyer.
- Clearing Corporation: A middleman like NSE Clearing that makes sure everyone gets what they were promised.
Read Also: What is a BTST Trade?
How Short Delivery Happens
- Selling Shares Without Actual Delivery: This is the most common type where the shares are not present in the seller’s demat at the time of trade. This is frequently seen in Buy Today, Sell Tomorrow (BTST) transactions.
- Technical or Operational Issues: This can even happen due to connectivity failures where timely instructions of share transfer are disrupted between the broker’s internal systems and the depository (NSDL or CDSL). Also, if the seller has different classes or shares and the broker identifies the wrong International Securities Number (ISIN) the transfer will fail and even depository lags may affect the share transfer.
- Errors in Broker or Trader Transactions: Human error like selecting “delivery” instead of “intraday” can affect the transaction if it is not noticed before the market ends, this can lead to delivery obligations that cannot be met. Also bugs in the brokers risk management system allows the sale of the shares that are already being used as margin collateral leading to shortage during pay-in-phase.
- Settlement Problems in the Trading Process: When a stock hits its “upper circuit,” it means the price has risen to its maximum limit for the day, and there are only buyers left in the market with no sellers. If a trader has a short position in such a stock, they will find it impossible to buy back the shares to square off their position. This forces the trade into the settlement cycle as a short delivery.
Understanding the Settlement Process in Stock Trading
What is the T+1 / T+2 Settlement Cycle?
Earlier in India settlement used to take more time but now it has been transformed. Previously it used to take T+2 days to settle meaning a trade executed on Monday will be settled by Wednesday. But in 2023 this settlement cycle transitioned to the T+1 settlement cycle. In T+1 cycle T stands for the day the order is executed and T+1 means one additional day when the share must be delivered and the funds are paid out.
This shift has reduced the margin requirements and counterparty risks, but it has also halved the time available for brokers and depositories to resolve any operational discrepancies.
How Shares Move from Seller to Buyer
It is a highly digitized process where once the sell order is executed, shares of clients are marked by the seller’s broker; these are then moved to the broker’s “pool account” and from here they are sent to the clearing corporation’s account. After this the clearing corporation identifies all the buying brokers and transfer is made to the respective pool account and in the final step it is credited into individual buyer’s accounts.
Role of the Stock Exchange and Clearing Corporations
The exchange (NSE or BSE) is the marketplace and the Clearing Corporation acts as the guard. They guarantee that the buyer will not lose money even if the seller makes a mistake.
What Happens If Short Delivery Occurs?
- Auction by the Exchange: In this the exchange identifies all the undelivered shares and an auction is announced, this auction is separate from the regular market and other people who want to sell their shares can do it during this time.
- Exchange Buys Shares: The exchange also buys shares from these auctions and places “buy” orders for the required quantity. The price offered in these auctions is generally higher (20% above the previous day closing) and if enough participants are there within the price range then the exchange buys them and delivers it to the original buyer.
- Impact on Buyers and Sellers: The buyer has to experience a delay in receiving the shares and if the stock price falls during this time opportunity cost is faced, although they are financially protected as they receive shares or cash premium. For sellers their sale is canceled and they are even charged for the cost of the auction. Also if the exchange buys it at a high price then the seller has to pay the difference.
- Penalties or Charges Involved
- Valuation Debit: The exchange blocks a certain amount from the seller’s broker to cover the auction price.
- Statutory Charges: GST at 18% is applied to the penalty and other exchange charges.
- Price Difference: The cost of buying the shares in the auction compared to the original sale price.
- Auction Penalty: A standard penalty of 0.05% of the total trade value is levied by the clearing corporation.
Read Also: What is Delivery Trading?
Short Delivery Auction Explained
It is a secondary market where the exchange buys shares to fix a delivery failure. It happens daily between 2:00 PM and 2:45 PM.
The exchange sets a “price band” for the auction. It is usually up to 20% higher or lower than the previous day’s closing price.
The formula used is: Auction Price Band = Closing Price ± ( Closing Price x 20%)
Timeline of the Auction Process
- Day 1 (T): Trade happens.
- Day 2 (T+1): Short delivery is found and the auction is held in the afternoon.
- Day 3 (T+2): Shares are delivered to the buyer.
Example of Short Delivery in the Stock Market
Step-by-Step Scenario:
- Lets say on Monday Mr.Verma sells 100 shares of “ABC Ltd” at Rs.500, even though he doesn’t own them and he plans to buy them back at 3:30 PM at a cheaper price.
- But ABC Ltd hits an upper circuit on the same day and he cannot buy the shares back.
- Then on Tuesday morning, the exchange sees that Mr. Verma has no shares to give.
- And on Tuesday afternoon, the exchange holds an auction and buys 100 shares from someone else at Rs.550.
The person who bought from Mr. Verma on Monday gets the shares on Wednesday and in this situation they have to pay an extra amount.
Mr. Verma has to pay the Rs.50 extra per share (Rs.5,000 total) because the auction price was higher additionally he also pays a penalty and taxes.
Impact of Short Delivery on Investors
Effects on Buyers
- Delayed Ownership: As the shares are not delivered the buyer cannot use them for trading or as collateral until he gets them into his demat account.
- Inability to Sell: As the shares are not in account buyers cannot sell them if the share is at a good price in the market which can lead to loss of the potential profits.
- Cash Settlement Risk: If the auction fails due to some reason the buyer is rewarded with cash instead of shares but the buyer might have done the investment for a long-term share for growth.
Risks for Sellers
- Financial Loss: The share price in auction is generally higher than the original price of the share which leads to direct monetary loss.
- Blocked Capital: In the auction process 120% to 150% of the traded value is blocked by the broker as a security against the potential auction cost.
- Reputational/Account Risk: Continuous short deliveries can lead to restrictions on the client by the broker and even the client can be reported to the exchange.
How Investors Can Avoid Short Delivery
- Share Availability: One shall always check their holdings before selling the shares. You need to make sure they are not unsettled shares.
- Settlement Timelines: You should never sell your shares the next day unless you are clear about the risk.
- Avoid Trading Errors: Traders shall always double check the selected option and look if “Delivery” is not selected if you are planning to do a quick “Intraday” trade.
- Maintain Sufficient Margin: One shall always have enough balance so the broker can adjust if things go wrong while you are short-selling for the day.
Short Delivery vs Short Selling
| Feature | Short Delivery | Short Selling |
|---|---|---|
| Meaning | A mistake where shares are not given | A plan to profit from the failing prices |
| Intention | No, usually it’s an error | Yes this is a deliberate strategy |
| Outcome | Leads to auction and penalties | Position is closed by buying back |
| Legality | Settlement failure, penalized | Fully legal and allowed for intraday |
Important Things Beginners Should Know
Investors shall look for prominent companies as big companies like Reliance or TCS trade in large numbers due to which short delivery is very rare. But investors shall always be cautious about small companies as they trade with few shares in the market and short delivery can happen more often.
Here the stock exchange acts as a referee and makes sure that if the seller makes any mistake then the buyers shall get the compensation fairly.
Knowing about T+1 helps you manage your money. You will know exactly when you can sell your shares again without any risk.
Read Also: What is Turtle Trading?
Conclusion
Short delivery may sound dangerous but this is a situation that can take place in the market. The best part is the system is created to protect your interest. Whether you are a buyer or a seller, you shall always be aware of the rules of the market for making the right move. You shall always watch your holdings and look for the right broking platform which can make trading simple.
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Frequently Asked Questions (FAQs)
Is short delivery a scam?
No, it is not a scam or illegal but it is a recognized settlement risk that happens when a seller fails to provide shares on time.
Will I lose my money if my shares are short delivered?
No. The exchange will either get you the shares through an auction or give you cash compensation that is often higher than the current market price.
How much is the penalty for short delivery?
The defaulting seller pays an auction penalty of 0.05% of the value, plus the price difference in the auction, and 18% GST on the charges.
Can short delivery happen in intraday trading?
Intraday trades are closed on the same day and short delivery generally takes place in delivery based trades where shares move between accounts.
How long does it take to get my shares after a short delivery?
Buyers may receive the shares in their demat account on T+2 day, which takes place one day after the auction takes place.
