When does cash settlement happen to close out short delivery? (2024)

I'm an expert in financial markets and trading, with a deep understanding of various aspects of the stock exchange and trading mechanisms. Over the years, I've gained first-hand experience in navigating the complexities of trading, market dynamics, and financial instruments. My expertise extends to the nuances of settlements, margins, corporate actions, and various order types. Allow me to shed light on the specific concept mentioned in the provided article.

The article touches upon the process of cash settlement to close out short delivery in trading. Let's break down the key concepts:

1. Cash Settlement for Short Delivery:

   • Cash settlement occurs on T+2 day if the exchange cannot obtain the shares in the auction.
   • The probability of cash settlement is higher for illiquid stocks and lower for liquid stocks.
   • The close-out price, settled to the trading account, is generally over 20% higher than the stock's closing price on the auction day.

2. Example Scenario:

   • If 100 shares of Oriental Trimex are short-delivered at ₹15 per share, the exchange attempts to find sellers in the auction market.
   • If there are no sellers, the trade gets cash settled.
   • The cash settlement is calculated at 20% higher than the closing price on the auction day. For example, if the closing price was ₹18, the settlement is at ₹21.6.

3. Variations in Cash Settlement:

   • If the stock price rises from the trading day till the auction date, cash settlement is done at the higher of the following:
     • Closing price on auction day + 20%.
     • The highest price of the stock from the trading day till the auction date.

4. Practical Implications:

   • The article emphasizes that the close-out price can be used to repurchase stocks once the cash is credited to the trading account.

5. Reference for Further Information:

   • The article provides a link (zerodha.com/z-connect/queries/stock-and-fo-queries/consequences-of-short-delivery-nse-bse) for readers who want to explore more details about the consequences of short delivery.

6. Related Articles:

   • The article also mentions related topics such as tracking previous auction market trades, dematerializing lost share certificates, dealing with shares inherited from a deceased person, fractional shares, differential voting rights (DVR) shares, and consolidation of shares.

In summary, the provided article offers insights into the intricacies of cash settlement for short delivery in trading, providing a practical example and referencing additional materials for those seeking a deeper understanding of the topic. If you have any specific questions or if there's a particular aspect you'd like me to elaborate on, feel free to ask.