What is Short Selling?
In simple words – sell first and buy later.
Short Selling – Selling of stocks that you do not own in your demat account. The goal is to profit from falling price of a stock (i.e. the trader is betting that the price of the security is likely to fall further and hence he can make a profit by buying it back at a cheaper price at a later stage).
Short Selling in Cash Market – Valid for an Intra-day period ONLY
In Indian equity markets, short selling is typically undertaken via the futures and options route and short selling in the cash market cannot be done for longer than ‘intra-day period’ (i.e. single trading session).
In other words, you can initiate the short trade (take short position) anytime during the day, but you will have to buy back the shares (square off) before the market closes. You cannot carry forward the short position for multiple days.
Example–
Scenario 1: Rajat sold 1000 shares of IDFC Bank at Rs. 50 for intraday expecting the price to fall below Rs. 50 before the end of the trading session. He was able to buy back the shares at Rs. 48 and hence made a profit of Rs. 2 per share.
Note – If you sell any stock for Intraday you are expected to buy it back by the end of the day to close your position.
Scenario 2: For a moment, let us assume that in the above example, instead of declining; the price of IDFC Bank starts rising. The loss on the above transaction will depend upon the extent to which the stock price rises before Rajat is able to buy back the shares (i.e. close the short position).
| Scenario 1 | Sell Price = Rs. 50
Buy Price = Rs. 48 Profit Booked = Rs. 2 |
| Scenario 2 | Sell Price = Rs. 50
Buy Price = Rs. 52 Loss Booked = (Rs. 2) |
Scenario 3: Now assume Rajat did not buy back/ cover his short position at the end of the day: SHORT DELIVERY
In such a scenario he will have to deliver these 100 shares of IDFC Bank on T+2 bases (i.e. within 2 days from the date of the trade). Since he does not have any shares, he would not be able to deliver and would default, thereby causing a Short Delivery.
Under a short delivery situation, the stock exchange would take up the issue and use AUCTION SETTLEMENT in the auction market which is conducted on T+2 day between 2:00 p.m. and 2.45 p.m.
What Happens in the Auction Market?
AUCTION SETTLEMENT PRICE – SEBI guidelines stipulate that the auction settlement will be at the highest price prevailing in the NSE/BSE from the trading day till the auction day; OR 20% above the closing price on the auction day, whichever is higher.
Auction day = T+2.
So in the example above, Rajat bought 100 shares of IDFC Bank at Rs. 50. Now on the auction day (in the auction market), Rajat’s broker was able to buy the shares at Rs. 54.
The price (including penalty) which Rajat will have to pay = AUCTION SETTLEMENT PRICE (Rs. 54) + BROKERAGE + PENALTY.
Penalty will depend upon the broker. Typically, brokers will charge you a penalty that will ensure that the AUCTION SETTLEMENT PRICE becomes 20% above the actual closing price at which the broker was able to buy the shares in the auction market.
So in the above case, Rajat will have to pay = AUCTION SETTLEMENT PRICE (Rs. 54) + BROKERAGE + PENALTY (Rs. 11 i.e. 20% of Rs. 54) = Rs. 66.
For a default of 100 shares, Rajat will have to pay the difference of Rs. (50-66)*100 = Rs. 1,600
As you will notice, it is very important that if you are short selling a stock, buy back the shares before 3:30 pm or you could end up paying up to 20% penalty in addition to the price at which the actual delivery (i.e. buy back of shares happens).
Other Important Points
- Effectively the settlement of the original trade will be in up to T+5 days (T+2 for auction and up to 3 days after that for settlement of the auction trade).
- Even if the broker was able to buy back the shares at a price below the price at which you short sold. For example at Rs. 48 in the above example, Rajat will get nothing and any profit will go to the investor protection fund maintained by SEBI. Basically, short selling and not covering your position is a bad thing to do!
- If no seller becomes available in the auction market, then the deemed auction settlement price along with the penalty is set at THE HIGHEST PRICE AT WHICH THE SHARE TRADED IN THE SESSION BEFORE THE AUCTION DATE + 20% OF THAT PRICE.
Short Selling on Margin
The problem becomes more startling when you do short selling on margins. Margin limit allows traders to take more exposure and gain from market movement with limited money.
Types of Margins which a Broker Allows*
Regular Margin = 4 TIMES THE AVAILABLE LIMIT*
* Based on the margins we work with, different brokers will have different margin limits).
With this margin facility, you can buy/sell stocks for up to 4 times your available limit.
Available limit is calculated as CASH AVAILABLE + VALUE OF YOUR HOLDINGS after haircut.
Suppose, you have a cash of Rs. 1, 00,000, and stocks of Rs. 2,50,000 in your account
Your Available Limit = Rs 1,00,000 + Rs. 1,75,000 (Haircut on stocks @ 30%) = Rs. 2, 75,000.
You can take short selling position of upto Rs. 11,00, 000. That is 4 times your available limit.
If you short on margin and then default, the penalty could be quiet hefty and may erode a substantial part of your capital.
Another Margin Product which many Brokers Offer – Margin Plus Product
MARGIN PLUS = 20 TIMES THE AVAILABLE LIMIT
In this margin facility, the allowed exposure is 20 times the margin. Thus if you have a margin of Rs. 2,75,000 you can take short selling position of Rs. 55, 00,000.
Margin Plus is allowed ONLY FOR AN INTRADAY ORDER PLACEMENT.
You need to square off the position 30 min before the closing bell of the market; otherwise the same will be squared off by the broker between 3 PM – 3.15 PM at whatever is the prevailing price. Further, the positions on margin plus are also squared off automatically if the loss reaches 70% of your available limit.
Final Word
Short selling can be a great way to multiply your trading gains but a default on your short position will be penalized heavily.
About Author
Thanks, it was nicely explained.
Sir one more suggestion, it would be great if you could build your mobile application.
Hi Nitesh – Do you have an account with us?
No
Ok. We do have an application for clients
Sir as you said.
66rs- 50rs =16Rs. 16×100=1600
Now I need to pay 1600 or 1600+ (50×100)= 6600rs.
No Only Rs. 1600. Basically the broker will but the shares at a higher rate and make the order good. You will have to pay the difference between closing price and the rate at which the broker will buy + penalty & brokerage
i sold cdsl at 430 but due to upper circuit i was unable to square of that
but today cdsl reached at lower circuit(399) my shares are in auction how my shares will be auctioned
Exactly how I meantioned above. At the highest intraday price for the day on which you went short, so in this case – 430
Sir i short 250 shares of infosys yesterday at Rs 1015 per share. But I did not buy the shares on that day. Now it has gone to auction.The auction is on Monday.The share price had gone Down to 923.25.will my loss be huge or will it be minimised due to the decline in price.
It should be minimised but you can not be sure until T+3 about the price at which the shares are brought back by the broker. If it opens higher than your buy price and the broker makes delivery by buying back on Monday, then of course you will suffer a big loss. In any event you will be paying a penalty. Read more here – http://www.blog.sanasecurities.com/short-selling-cash-market/
Dear Rajat Sharma, how can 250 shares of Infosys can go to auction? Afrid Ali must have shorted infosys shares on intraday basis and it must be auto squared off by the borker before 3.20 pm. Then how can his share can go to auction. And also he couldnt sell the shares from his demat account bcoz he didnt hav any share of infy in his demat account. Waiting for your reply.
The assumption in short selling is that he did not have INFY in his DP. No, most brokers will not auto square short positions at 3:20 (they will do that only for margin positions). Reason – what if the client wanted to make good the delivery from another of his DP using a slip? How does the broker know that he does not have INFY shares in another account?
Hi sir
I sold 1000 share bomdying at 114.50 but due to upper circuit not buyer.
How many rupees panalty would be
I shorted 50 stocks of sbi at ₹314 in nse but bought at ₹311 the same qty in bse. The shorted stocks will go to auction or will be settled??????
Call your broker. He is the best person to advise on on this. It should not go into auction.
Hi Sir..I short sell the Canara bank Shares on 25th Oct: 1844 * 437 now the share price is 404.90..now it is going to Auction process…how much i will get penalized/loss..
Please help me sir..i am very tensioned..
Short sale was made by client.Should broker not give complete bill with contract bill?
Contract note indicating: I mean auction was internal or nse-auction.Buy prize,trade time,trade details….. etc. details as per sebi formay format
Ask them for it. They will make one and give you.
Hi sir I short sell 400 shares of gss at 80.89 on nse after the stock get upper circuit of 20% I can’t able to buy it so what is the full process and which day it action and how much penalty which date it finish all process please answer me rapid
Hope the call helped 🙂
Sir,me bahut tension me hu.mene 3/10/18 Ko tech Mahindra ka share purchase Kiya tha or 4/10/18 Ko sale kar diya pr aj call aaya ki apko share allotted hi nahi hua he so apko penalty hogi.to sir iska kya rasta he or kitni penalty hogi??? Maine share loss me sell Kiya he
I am sorry to hear this. What kind of broker do you use?
Sir I sold 371 bandhan bank share on BSE instead of 300 and unknowingly I purchased 71 shares of NSE to squreoff my account but someone said it can’t be set off and auction will take place..is it true? N what about any gain in auction? Bcoz share prices are decreasing so I m sure there will be gain but on the other hand I will have loss on share purchased on NSE…so I need suggestion whether it can be set off or I should hold NSE share or sale? Is there are any chances that I can gain in one and make loss in other as sale and purchase took place at same rate.
Yes. Cant be set off and will go in auction. No gain + Penalty
Hi sir,
I am badly in need of your advice. I have purchased around 2L rupees share in Nov 1st. Since the price did not went up I could not sell the same on 1st. But, on 2nd the price went up and I sold all the shares. Only at that point I came to know about short selling and penalty. My broker said, as the shares are not delivered to my account, it will result in short sell. From the above blog, I undersatnd the auction will happen only after T+2 working days. So in my case, if the shares which I bought on 1st)are delivered to me before the auctining day, will it result in auction and I need to pay penalty? Looking for your advice at the earliest. Thanks, Binoj Phone: 9916389627
“So in my case, if the shares which I bought on 1st)are delivered to me before the auctining day, will it result in auction”.
If this happens, obviously there would have been no auction. But this will not happen. My sense is that you traded in a share where liquidity is not as high as it is in large index constituent shares where you get the delivery the next day. There will be an auction in your case. and you will get the delivery of your shares on the same day as of the auction.
On 6.12.2018 I short sell 100 shares of Vakrangee at the rate of 38.35 per share.
But due to upper circuit I could not buy back the shares.
Now it will go for auction.
What penalty I have to pay and what will be the auction date.
Hi Sir,
I bought 1500 Canara bank @261.30 and sold @255 on 19th June 2019, however due to partially execution of the order I again sold the remaining 1402 shares at same price 255.And now the remaining 1402 share are in auction and share price raise at 268.30 as of today can you please help me how much penalty I have to pay?
You will need to reach out to your broker for this.
Hello Sir,
I have SHORT sell JSWSTEEL- qty – 600 shares at 228 PRICE AND I am not able to buy it on same day.
so how much charges and penalty.
Thanks,
I short sell midhani 2000 shares @ 216 and it went up due to upper circuit the highest price is touch@ 248..
What will be the exact loss of mine here?
If short position in NSE has not been cleared in intraday (MIS) due to technical problem in the broker server and positions were not auto squared off but next day broker did not deduct the money and did not inform to me that there was short delivery. He has deducted my money after 9 days then who will bear auction penalty. There is no penalty for broker.
You will
Sir i buy a share in intraday of GAIL in 80rs but i sell for 76rs in delivery this process i make repeatedly i dont no what is what i dont have knowledge about that lastly the broker send a contractnote that describes charge of 94.5rs at that day mentioned and time about 4pm and
the unit of GAIL will be AUCTION but i couldn’t see in my portfolio
What i do at this time??
Is there any penalties or any future interruptions will happend??
sir,I BUY 150 SHARE OF AVANTI FEED , AFTER T+2 ,BROKER MASSAGE ME THAT EXACHANGE HAVE
DELEVERED ONLY 100 SHARE . NOW THIS POSITION CAN EXCHANGE GIVE ME HIGHER RATE +20%
CONSOLATION.
NARWADE
IF I BOUGHT SHARES BUT I DONT GET SHARES AFTER T+2 DUE TO OPPOSITE PARTY SHORT FALL… ANY COMPENSATION WILL BE PROVIDE BY NSE FOR BUYER?
This will not happen
Hello Sir!!
I checked your article here as well as https://zerodha.com/z-connect/queries/stock-and-fo-queries/consequences-of-short-delivery-nse-bse
Now in my case what has happened is I used margin on IDFC which was somewhere 12x
This was MIS order , so I took 11785 shares at 14.20 in 13k+ amount..so total order was worth 167156.67
The way I understand , it will go in auction due to short delivery and buy will be done
My doubts are
1. 20% cap is on which days price T0/T1/T2? and how I will be charged?
2. I used margin so what would be penalty?
3.If I go be calucaltions as an example I have to pay difference that I can handle but what happens with margin? If final cost(i.e. penalty+settlement) is 18rs then total cost would be 2lakh Rs?
can you inform what happemed in your case finally ?
Sir, I sold the shares day before its delivery but before delivery to me it was already short delivered. How will it affect me