Before we understand short selling in delivery, let us spend a moment understanding the rolling settlement system in India. Indian markets currently operate on a T+2 rolling system. That means if you buy or sell a stock in the morning and do not square off before the end of trade on the same day, then it compulsorily goes into delivery. If you sell and don’t square off before the end of trading on the same delivery, you need to give delivery of shares. If you cannot give shares, it becomes short delivery. Short selling in delivery can have a steep cost as in such cases the stock could be for auction and you may end up bearing a huge loss. But that is another matter.
Short selling in delivery
Intraday traders are OK in the Indian market, either it can be bought and sold or sell and buy. But if you sell and don’t give delivery, it becomes short selling in delivery. This system means that if shares are purchased the client must pay the full amount and take delivery in Demat account. More importantly, if shares are sold for delivery, the client has to deliver shares to the exchanges to be transferred to the corresponding buyer. Failure to do so becomes short delivery or short selling in delivery.
Let us quickly go back to our rolling settlement system. Since our focus is on short-selling delivery, we will only look at the sell-side of an equity transaction. For example, if you sold shares on T day, then your trade is settled on T+2 day i.e., after 2 working days. If you don’t give delivery of shares by then, it is short selling in delivery. The buyer has already bought and paid for the stock, so the exchange will auction these shares and buy from the highest bidder and give them to the buyer. The auction loss will be borne by you, the person who is responsible for short delivery.
Let us now understand short delivery with a live example. You sold 500 shares of Tata Motors believing you already have shares in your Demat account. In case you sold without having delivery, it becomes short delivery. In such cases, the buyer will have to get the delivery so the buyer will get it from the auction. The auction losses are debited to the seller who is guilty of short delivery. Even if you did short delivery of shares by mistake, you still need to compensate the exchange for auction losses, since the exchange clearing corporation guarantees every trade in the market. It must be remembered that in the event of short delivery, exchange delivery to the buyer will only be on T+3 day.
Of course, there are in-built checks and balances to prevent short delivery. For example, online trading platforms will not allow you to sell the stock unless there is clean delivery available in the Demat account. But one area where such short delivery risk does arise is from BTST transactions. When traders buy on T day and sell on T+1 day, the assumption is that the stock they buy gets delivered on T+2 day. If that stock is short delivered to the buyer, then they may end up with short delivery. That is the risk you run.
Delivery trading strategies
Short delivery is more of a procedural problem. It is also instructive to look at what are the delivery trading strategies. For taking delivery trading, traders can adopt a trader strategy or an investment strategy that is long-term in nature. Alternatively, traders can adopt a growth approach to delivery or a value approach to delivery. The choice is huge and the choice is entirely in the hands of the trader.
What are charges for delivery trading
Delivery trading entails brokerage and a host of statutory levies like STT, GST, stamp duty, exchange charges, SEBI turnover tax, etc. Normally, most brokerages charge higher brokerage for delivery trading and lower brokerage for intraday trading. However, of late the discount brokers have turned the model on its head. They are charging for intraday trading and F&O trading but keep delivery trading free of cost.
