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Short Selling Shortage - Auction Process

Updated 25-May-2015

I short sold shares in intra day trading and was unable to buy them back, what will happen now?

When you sold short (seller shortage) those shares there was someone on the other side who bought them. He won't get delivery. So your broker will try to purchase them in a buy-in auction market on T+2 day and the settlement of the auction shall be done on T+3 day (where T is the transaction day, holidays are not included).

If the auction is successful the defaulting client (you) will have to pay the actual auction price + Brokerage + Penalty( this depends on your broker)

What will be the auction price - That depends on the price of the stock on auction day. The lowest or minimum offer price in auction can be 20% below the closing price on a day prior to the day of auction. If it's lower then you might gain but this difference is not given to you it goes to Investor Protection Fund (some brokers pass the gain to you), if it's higher you will have to pay the difference. Your broker will send you an email at the end of day with the detailed information.

If the auction is not successful, no one is ready to sell in the auction (generally happens when the stock hits upper circuit), the sell transaction is cancelled by the exchange and the defaulting member has to pay the highest price prevailing from the day of trading (T) up to a day prior to the auction day OR 20% above the official closing price on the day prior to auction day, whichever is higher. The buyer of those shares gets a full refund.

Auction is carried out in case of Short deliveries and Bad deliveries.

Short Deliveries - When you short sell the shares but forget to buy them back at end of day for intraday trading or you accidently buy them on BSE while you sold them on NSE.

Bad delivery - It does not happen in demat form. If the physical share transfer paper is torn or there are spelling mistakes, bad signature etc.

Frequently Asked Questions (FAQ) on short selling

- Can a retail investor/trader participate in an auction market?
 No, only clearing members aka your broker can participate. It's a separate trading session which is different than the normal trading session.

- Is Short Selling allowed on cash and carry or delivery basis?
 No, short selling is only allowed on intraday basis.

- Internal Shortages - When both buyer and seller are clients of the same brokerage.

- Valuation Price and Valuation debit - Valuation price is the closing price of the share ( x no. of shares not delivered ) on T + 1 day. The valuation price is then debited from the defaulter's account. If the auction price is more than the valuation price, the defaulting member has to pay the difference. Some brokers debit valuation price on T+1 day from your account and the remaining amount on T+2 while some brokers debit the full amount on T+2.

We request all visitors to post the auction shortage settlement email they receive from their broker in the comment section which would help other people.

More information NSE