Auction by Exchange:

• T+1 Day Auction:
• On T+1 day (one day after the transaction), the exchange identifies any short deliveries.
• The exchange then conducts an auction to procure the missing shares from other sellers in the market.
• Auction Price:
• The auction price is determined based on the stock's closing rate on the trading day prior to the auction.
• There is a maximum fluctuation limit of 20% above or below the stock's closing rate to set the auction price.

Process:

1. Identification of Short Delivery:
• On the day after the trade (T+1), the exchange identifies instances where sellers have failed to deliver the promised shares.
2. Notification:
• The exchange notifies both the buyer and the seller about the short delivery.
3. Conducting the Auction:
• The exchange conducts an auction to buy the undelivered shares from the open market.
• The auction is usually held within a specified time frame on T+1 day.
4. Auction Price Determination:
• The auction price is based on the closing price of the stock on the previous trading day.
• The price is allowed to fluctuate within a range of ±20% from the closing price to accommodate market variations and ensure fairness.
5. Settlement of Auction:
• The shares bought in the auction are delivered to the buyer, fulfilling the original transaction.
• The defaulting seller is required to pay the difference if the auction price is higher than the original sale price, along with any applicable penalties.

Example Scenario:

• If a seller fails to deliver 100 shares of Company XYZ by T+1 day, the exchange will organise an auction.
• Suppose the closing price of Company XYZ on the previous day was ₹100. The auction price could vary between ₹80 (20% below) and ₹120 (20% above).
• The auction is conducted, and the shares are procured at ₹110.
• The defaulting seller is then required to cover the additional cost of ₹10 per share (₹110 - ₹100), along with any penalties imposed by the exchange.

By handling short deliveries through this auction process, the exchange ensures that the buyer receives the shares and that the integrity of the market is maintained.