Short Selling & Auction Process

To iVENTURES CAPITAL From Ashok Kumar Maity

Short Selling
y Short Selling is a strategy that means to sell something that you do not own. When you buy back a short position, you "close your short position.

How To Get Shares After Short Sell

y Market y Broker y Borrowing
y SLBS (Security Lending and Borrowing Scheme)

Auction Market
y A market in which buyers enter competitive bids and sellers enter competitive offers at the same time. Matching bids and offers are then paired together and the orders are executed. When to go for auction market? y When someone goes for short sell and was not able to short cover his position.

Valuation Debit
y The minimum amount that is to be kept with the exchange by the broker to enter into the auction market. y The minimum amount will be the highest price of T+0,T+1, and T+2 or 20% extra on closing price of T+2.

Example
Let us consider Stock X Selling price on T+0 is Rs. 105 No. of Shares= 100 Lowest Price 89 91 94 Highest Price 107 110 109 Closing Price 101 98 100 Prices are in Rs.

Opening Price T+0 T+1 T+2 98 104 101

* Highest price = 110/Total amount = 110*100 = 11000/* 20% of closing price of T+2 + closing price of T+2 = 120/Total amount = 120* 100= 12000/-

Function of Auction Market

y Auction market opens on T+3 *.

* Exchange allows only brokers to participate in the auction process. It doesnt allow any individual.

Contd
On T+3: y 12:00 Noon:- Brokers enter into the auction market. y 12:00noon 12:30pm:- Bidding is allowed. y 12:30pm 1:00pm:- Matching is done by the exchange. y 1:00pm:- Exchange declares whether broker gets shares or not.

* In auction process brokers are allowed to bid up to 120% of the previous closing price (closing price on T+2).

Contd
y In the case of short sell settlement is done on T+2 though seller is not having shares in his/her D-mat account.

y Here settlement is done by exchange by saying the buyer that he/she will be getting shares on T+3 or T+4 or T+5 or etc.

If broker doesnt get shares in auction market:

Possibilities for not getting shares: y Non availability of shares from participated brokers. y If matching is not done.

In this case exchange pays compensation to the buyer. The process is

Contd
y Exchange takes 20% extra amount on selling price of the shares (on T+0). y Out of this exchange pays the amount buyer paid on T+0 and also be paid a compensation around 16.5% on selling price. y Remaining 3.5% on selling price will be kept by the exchange in IPF (Investor Protection Fund), & SGF (Settlement Guarantee Fund).

Thanks for your patience listening