Definition
Short Delivery
Short delivery occurs when a seller fails to deliver the shares they sold by the settlement deadline, leaving the buyer's trade unfulfilled and triggering an exchange auction to source the shares.
In India's T+1 settlement, if a seller cannot deliver, the clearing corporation conducts a buy-in auction to procure the shares for the buyer, and the defaulting seller bears the difference plus penalties. Short delivery commonly arises from selling shares not in the demat account or from a failed SLB position.
To avoid short delivery, traders use securities lending and borrowing to source shares before the deadline. The auction price can be punitive, sometimes well above market, so persistent short delivery is costly and is one reason cash-market short selling in India is largely restricted to intraday.
Related terms
- Clearing CorporationA clearing corporation is the entity that clears and settles trades on an exchange, becoming the buyer to every seller and the seller to every buyer through novation, and guaranteeing settlement.
- Securities Lending and Borrowing (SLB)Securities Lending and Borrowing is a regulated mechanism that lets investors lend their shares for a fee to borrowers who need them, typically to facilitate short selling or settlement.
- Auction SettlementAuction settlement is the exchange process of buying in shares to resolve a short delivery, where the clearing corporation auctions the failed quantity and delivers the purchased shares to the affected buyer.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.