Short answer

If the exchange cannot obtain shares in the auction to cover a short delivery, it credits cash to your trading account instead. This usually happens on T+2 day. Cash settlements are less likely for liquid stocks and more likely for illiquid ones.

How the exchange calculates your cash settlement

Your cash settlement is always the higher of:

Settlement price on auction day + 20%

The highest price of the stock from the trading day until the auction date

Special scenarios

Trade-for-trade (T2T) scrips

For T2T scrips, the exchange does not conduct an auction. Instead, it settles shortages through closeout at the higher of:

The highest price on T day across all exchanges, or

20% above the settlement price on T day.

Securities under corporate action

For scrips that cannot be auctioned due to a corporate action, the exchange compulsorily closes out the position at the higher of:

10% above the official settlement price on the auction day, or

The highest traded price from the first trading day of the settlement until the auction day.

Closeout for bonds

AAA and above-rated bonds or debentures: the closeout price is the higher of the highest exchange rate from the start of the trading period to the closeout day, or 5% above the auction day’s official settlement price.

Bonds and debentures rated below AAA: a 20% closeout markup applies.

Closeout price for unsuccessful shortages

As per the exchange circular, if the exchange cannot buy all the required shares in an auction, it uses a Weighted Average Price (WAP) for auction settlement.

Example scenario

There is a shortage of 1,000 shares. The exchange tries to buy them in an auction, but only finds some:

800 shares are bought at ₹100 (Auction Price).

200 shares could not be bought, so they are closed out at ₹120 (Closeout Price).

How the exchange calculates the Weighted Average Price (WAP)

Instead of charging two different prices, the exchange blends them into one:

(800 shares × ₹100) + (200 shares × ₹120) = ₹1,04,000 (Total Cost).

₹1,04,000 ÷ 1,000 shares = ₹104 per share (Weighted Average Price).

The final settlement

For you as the seller: you are debited a flat rate of ₹104 per share for the entire 1,000 shares (Total: ₹1,04,000).

For the buyer: they receive the 800 shares that were bought, plus a cash credit of ₹120 per share for the 200 shares that were not available in the auction.

If no shares are purchased in the auction, the closeout price (₹120) applies to the full 1,000 shares for both the buyer and the seller.