We have already discussed short selling process. Now, suppose Ravi has short sold 100 shares of Reliance Industries at Rs. 900, but he does not own the shares. At the end of the day, Ravi could not buy the shares back. So, what will happen now? This is called a short delivery and this is followed by an auction process in Indian stock market.
Ravi did not own the shares but he short-sold the stocks and he did not buy back the shares and failed to deliver the stock to the buyer. To make good the short delivery he now needs to buy the shares from the auction market and give delivery to the buyer of the share. Ravi need not do anything personally. Rather his broker will purchase the shares from the auction market and give the delivery to the buyer.
What is an auction process in Indian stock market? The auction market opens after 2 days of the trade (T+2). On the auction day, suppose the share price of Reliance Industries is hovering at Rs. 950. Ravi’s broker wi buy 100 shares at Rs. 950 and will deliver to the stock buyer. The buyer needs to pay only Rs. 900, the same price at which Ravi short sold. The extra 50 rupees per share needs to be paid by Ravi. Ravi also needs to pay the auction penalty charges.
Now suppose even in this auction process in Indian stock market, the share is not available, that means there is no seller available in the auction market. In this situation, how will Ravi fulfil the short delivery? He now needs to pay straightaway 20% of Rs. 900 or Rs. 180 as the penalty charge. So, the auction market works on its own. In case of a short delivery, the trader needs not to go anywhere, rather the auction will take place automatically inside the stock exchange and the penalty charge will be deducted automatically from the trader’s trading account. The buyer, on the other hand, will receive the penalty charge to his account.