Auctions, Short Delivery and Corporate Actions
When a seller fails to deliver on T+1, the Clearing Corp runs an auction on T+1 afternoon to source the shortfall from the market. Buying clients get delivery (...
Auction Mechanism + Corporate Actions
When a seller fails to deliver on T+1, the Clearing Corp runs an auction on T+1 afternoon to source the shortfall from the market. Buying clients get delivery (auction succeeded) or cash-settlement at close-price + 20% penalty (auction failed). Corporate actions like bonus, split, dividend, rights require adjustments to open positions and demat balances.
Auction: on T+1 afternoon, the CC announces the short quantity and calls for auction offers. Market participants submit offers; the lowest-priced offer wins (auction price). The defaulting seller is debited: auction price + penalty + interest. If auction fails (no offers), cash-settlement at close-price × 1.2 (higher of previous close +20% or T+2 high +10%). Corporate actions adjusted on all OPEN positions: bonus → lot-size + strike adjustment; split → same; dividend (extraordinary only, i.e. ≥ 2% of spot) → strike reduced by dividend amount; ordinary dividends → no F&O adjustment.
CC sources the missing shares from market offers
Defaulter pays: auction price + penalty + interest
Lot size doubles, strike halves (for 1:1 bonus)
≥ 2% of spot → strike reduced by that amount
A Practical Example
Trading day T: Ravi buys 1 lot (250) Reliance futures; seller X fails to deliver on T+1.
• NSCCL auction on T+1 15:00 — sources 250 RIL at ₹2,420 (vs closing ₹2,400 of T)
• Ravi gets his 250 RIL delivered as normal
• Seller X is debited: ₹2,420 × 250 + penalty 0.09% + interest = ₹6,05,000 + ₹545 + ₹300 ≈ ₹6,06,000
• Seller X tried to sell short @ ₹2,400 but ended up paying ₹2,424 effectively — painful lesson
Separately, RIL declares 1:1 bonus ex-date 15 May. Ravi's 1 lot (250 shares at strike ₹2,400 call) becomes 2 lots (500 shares at strike ₹1,200 call). Economic value preserved.
What Makes This Important
Frequently Asked Questions
SEBI defines an extraordinary dividend as ≥ 2% of the stock's market price. These are infrequent and material — hence the F&O adjustment. Regular quarterly dividends are almost always < 2% and not adjusted.
🧠 Quick Quiz
2 questions to check your understanding