When does cash settlement happen to close out short delivery?

Modified on Thu, 14 Jul 2022 at 01:24 PM

Cash settlement to your trading account typically happens on T+3 day if the exchange is unable to procure the shares in the auction. See What is short delivery and what are its consequences?

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The close-out price at which the transaction is settled to your trading account is always higher than the closing price of the stock on the auction day, typically more than 20%. Once the cash is credited to your trading account, you can use it to buy stocks again.

The chance for cash settlement is low for liquid stocks, and high for illiquid stocks.

Example scenario

  1. You buy 100 shares of Oriental Trimex at ₹15 per share, and these are short delivered.
  2. The exchange tries to find sellers who can deliver 100 shares of Oriental Trimex in the auction market to deliver to your demat account.
  3. If there are no sellers in the auction market, the trade gets cash settled.
  4. If the closing price of Oriental Trimex on the auction date was ₹18, the exchange cash settles the trade at ₹21.6 (20% higher than 18).
  5. The seller who defaulted pays the auction penalty of ₹360 ((21.6 - 18) * 100).
  6. You receive ₹2160 (1800 closing price on the auction date + 360, the auction penalty).
  7. If the price of Oriental Trimex reaches ₹25 (from the day of trading till the auction day), then the cash settlement is done at ₹25 instead of ₹21.6.

This is because cash settlement always happens at whichever is higher of the following:

  • The closing price on auction day + 20%.
  • Highest price of the stock from trading day till auction date.

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