In this process short delivery is settled by the Member broker internally among his clients instead by the exchange through buy-in auction.
Suppose ‘A’ & ‘B’ are clients of the same broker. Client A has bought 100 shares of RIL for delivery and on the other side of that trade B has sold 100 RIL.
There has been short delivery of 100 shares of RIL from client B. In such a case, the broker will buy 100 shares of RIL for client A on T+2.
In addition to the 100 shares, client A will also get a credit of 3% of the buying price in his account. An amount equivalent to the shares buying price + 3% of the buying price is debited from client B.
Monday: A bought 100 RIL @ Rs 800 (and B sold to A)
Wednesday: B failed to deliver the shares
Since A and B are both clients of the same broker, the shares will not be delivered by the exchange and the settlement will have to be done by the broker internally.
Let’s say the price of RIL on Wednesday was Rs 850. We as a broker will buy the 100 RIL @ 850 for A in his trading from the market at the current price.
So in A’s ledger there will be a debit entry of
850 x 100 = Rs 8,50,000 + statutory expenses
At the same time there will be a credit entry in A’s account of
(850 + 3% of 850) x 100 = Rs 8,75,500
At the same time since B had caused Delivery shortage, B will be debited Rs 8,75,500 as auction penalty
In nutshell, client A receives 100 RIL and an additional amount 8,75,000 – 8,50,000 = Rs 25,000*
In case we are unable to buy the shares in A’s account due to reasons like low liquidity, upper circuit or any other reason, we will close-out the trade on the auction trade day (T+2). Hence in such a scenario A will not receive the shares but will receive a credit in his/her account of an amount equivalent higher of
T+2(i.e. Auction trade day) closing rate of that scrip + 10%
the highest price prevailing in the NSE/ BSE from the first day of the relevant trading period till auction trade day
Similarly, B will be debited of the same amount.
*Statutory charges and brokerage will be as applicable