Auction Process in Indian Markets/Security Shortages Handling at BSE and NSE

A buying-in auction is conducted for the security shortages on the day after the pay-out day through NSE/BSE trading system i.e. on T+3 day. An Auction Tender Notice is issued to the Members informing them about the names of the securities short or not delivered, quantity slated for auction and the date and time of the auction session.

The session is open on BSE between 11:00 a.m. and 12 noon for all the scrips under Compulsory Rolling Settlements except those in "Z" group and scrips on "trade to trade" basis (T group scrips) which are directly closed-out. The Members, who participate in the auction session, can download the Delivery Orders in respect of the auction obligations on the same day, if their offers are accepted. The Members are required to deliver the shares in the Clearing House on the auction Pay-in day, i.e. T+4. Pay-out of auction shares and funds is also done on the same day, i.e., T+4.

On NSE the auction is carried out on T+3 rd day and auction settlement happens on T+5th day.

Auction is carried out in the following two cases

Short deliveries
Bad deliveries

Short Deliveries: If a member is not able to deliver securities on the day of pay-in then it is considered as Short delivery. It happens when a speculator who sells shares that he doesn’t own (short selling) fails to square up his transaction within a trading cycle.

Bad Delivery: Bad delivery exists only in the case of physical share transfers. It doesn’t exist in de-mat form of securities. If a physical transfer deed is torn, mutilated, overwritten, defaced, or if there are spelling mistakes in the name of the company or the transfer then it is considered as bad delivery.

Clearing agency identifies members who are fully/partially short of securities delivery on securities pay-in day and debits their account by an amount calculated at the valuation price. The valuation price is the closing price of the security on the preceding trading day of securities pay-in day.

Then the exchanges conduct auction to get the securities and delivers them to the buyers who have not received the securities. Auction is a separate trading mechanism which is different from the normal trading. There is separate trading session wherein brokers are allowed to quote offer prices. Unlike normal trading session, where order matching is done continuously, the quotes are captured and placed in ascending order of price and matched at the end of the session.

If the auction price is more than the valuation price the member who defaulted will have to pay the differing amount.