Personal Website of R.Kannan
Learning Circle - Capital Market of India
BSE Mumbai Stock Exchange

Shortages & consequent actions

The members download Delivery/Receive Orders in their back offices based on their netted positions for transactions entered into by them during a settlement in 'A', 'B1', 'B2', and 'F' group scrips and on trade to trade basis, i.e., without netting buy and sell transactions in scrips in "C" & 'Z' groups and scrips in B1 and B2 groups which have been put on trade to trade basis as a surveillance measure.

The seller members have to deliver the shares in the Clearing House as per the Delivery Orders downloaded. If a seller member is unable to deliver the shares on the designated Pay-in day for any reason, his bank account is debited at the standard rate (which is equal to the closing price of the Scrip on the day of trading) fixed by the Exchange for the quantity of shares short delivered. The Clearing House arrives at the shortages in delivery of various Scrips by members on the basis of their delivery obligations and actual delivery.

The member-brokers can download the statement of shortages in delivery of scrips in A, B1, B2, C, Z, F & G group scrips on T+2 day, i.e., Pay-in day. After downloading the shortage details, the member-brokers are expected to verify the same and report discrepancy, if any, to the Clearing House by 1:00 p.m. If no discrepancy is reported within the stipulated time, the Clearing House assumes that the shortage of a member-broker is in order and proceeds to auction/ close-out the same. However, in 'C' group, i.e., Odd Lot segment the member-brokers are themselves required to report the shortages to the Clearing House.

AAn Auction Tender Notice is issued by the Exchange to the member-brokers informing them about the names of the scrips short or not delivered, quantity slated for auction and the date and time of the auction session on the BOLT. The auction for the undelivered quantities is conducted on T+3 day between 11:00 a.m. and 12 noon for all the scrips under Compulsory Rolling Settlements except those in "Z" group and on "trade to trade" basis which are directly closed-out. The auction offers received from the member-brokers in batch mode are electronically matched with the auction quantities so as to award the 'best price'. The member-brokers, who participate in the auction session, can download the Delivery Orders in respect of the auction obligations on the same day, if their offers are accepted. The member-brokers are required to deliver the shares in the Clearing House on the auction Pay-in day, i.e, T+4. Pay-out of auction shares and funds is also done on the same day, i.e., T+4.

The various auction sessions relating to "shortages" in normal Rolling Settlements and "bad deliveries", i.e., securities in physical form lodged for transfer by purchasers but received back from companies or their transfer agents under objection are now conducted during normal trading hours on BOLT. Thus, it is possible to schedule multiple auction sessions on a single trading day.

In auction, the highest offer price is allowed upto the close-out rate of a Scrip and the lowest offer price can be 20% below the closing price of a Scrip on a day prior to day of auction. A member who has failed to deliver the securities of a particular company on the pay-in day is not allowed to offer the same in auction. He can, however, participate in auction of other Scrips.

In case no or partial offers are received in auction for a particular Scrip, then the entire or balance quantity of shortage respectively is closed-out at a close-out price, determined by higher of the following:-

• Highest price recorded in the scrip from the settlement in which the transaction took place upto a day prior to the day of the auction, OR

• 20% above the closing price on a day prior to the day of auction.

However, the close-out of the shares under objection, shortages in "C" & "Z" groups and scrips which are on "trade to trade" basis for surveillance reasons, where facility of auction is not available, is done at the highest price recorded in the scrip from the trading day upto the pay-in day or 10% above the closing prices of the scrips on the day prior to the date of auction, i.e., pay-in day, whichever is higher.

In case of debentures and bonds traded in "F" group, which are assigned a credit rating of triple "A" or above by a Credit Rating Agency, the close-out mark up is 5%. However, for the other debentures and bonds below the triple 'A" credit rating, the existing close-out mark up of 20% is applied as in the case of scrips in A, B1 & B2 groups.

In case of shortages in "G" group, the shortages are closed out at Zero Coupon Yield Curve (ZCYC) plus a 5% penalty.

The close out amounts are debited to the bank accounts of those member-brokers who have failed to deliver the securities against their sale obligations and credited to the bank accounts of member-brokers who had bought the securities but have not received the same.

Further, in case of short delivery, if the auction price/close-out price of a scrip is higher than the standard price of the Scrip in the settlement in which the transaction was done, the difference is recovered from the seller who failed to deliver the Scrip. However, in case, auction/ close-out price is lower than standard price, the difference is not given to the seller but is credited by the Exchange to the Investors Protection Fund set up by the Exchange. This is to ensure that the seller does not benefit from his failure to meet his delivery obligation. Further, if an offeror member fails to deliver the shares offered in auction, then the transaction is closed-out as per the normal procedure as explained above and the original selling member pays the difference between the standard rate and offer rate and the offeror member pays the difference between the offer rate and close-out rate.

Self- Auction

As has been discussed in the earlier paragraphs, the Delivery and Receive Orders are issued by the Exchange to the member-brokers after netting off their purchase and sell transactions in scrips where netting of purchase and sell positions is permitted. It is likely in some cases, a selling client has failed to deliver the shares sold in a settlement to a member-broker. However, this did not result in failure of the member-broker to deliver the shares to the Clearing House as there was a purchase transaction of his some other buying client in the same scrip and the same was netted off for the purpose of settlement. However, in such a case, the member-broker would require shares so that he can deliver the same to his buying client, which otherwise would have taken place from the delivery of shares by his selling client. To provide shares to the member-brokers, in such cases, so that they are in a position to deliver them to their buying clients, they have been given an option to submit the details of such internal shortages on floppies for conducting self-auction (i.e., as if they have defaulted in delivery of shares to the Clearing House). Such floppies are to be given to the Clearing House on the pay-in day. The internal shortages reported by the member-brokers are clubbed with the normal shortages in a settlement arrived at by the Clearing House and the auction is conducted by the Clearing House for the combined shortages. A member-broker after getting delivery of shares from the Clearing House in self-auction credits the same to the Beneficiary Owner accounts of his buying clients if the securities are received by him in demat mode or hands over the same to them in case the securities received are in physical form and debits his seller clients with the amounts of difference, if any, between the auction price and actual sale price of the scrips on the day of the trading.

It may be pertinent to mention that at present over 99.5% of the sale transactions that result in delivery of securities on the Exchange are settled by delivery in demat mode. The physical delivery of securities is only less than 0.5% of the sale transactions that result in delivery. This is mainly due to the fact that the investors have still an option to deliver upto 500 shares in physical form even in respect of scrips where delivery of securities is compulsorily required to be made by all investors in demat mode. Thus, delivery of securities in physical form is still permitted at the Exchange although its percentage in total delivery of securities is miniscule.

Objections

The receiving member-brokers, who have bought the securities in a settlement, are required to collect the physical securities from the Clearing House on the Pay-Out day. The same are required to be checked by them for good delivery as per the norms of good and bad delivery of documents prescribed by the SEBI. If the securities are not considered good delivery by the receiving member-broker, he has to obtain an "arbitration" award from the arbitrators and submit the same in the Clearing House along with the arbitration award on the following day of the Pay-Out (i.e.,T+3). The Clearing House returns these securities to the delivering member-brokers, who delivered the relevant securities in the settlement earlier, on the same day, i.e., T+3. If a delivering member-broker feels that arbitration award obtained against him is incorrect, then he is required to obtain arbitration award for invalid objection from the member-brokers of the Arbitration Review Committee and return the shares with the arbitration award to the Clearing House. The delivering member-brokers are required to rectify/replace the objections and return the shares to the Clearing House on next day (T+4) to have the objection entry against them removed. The rectified securities are delivered by the Clearing House to the buyer member-brokers on the same day (T+4). If a buyer member-broker is not satisfied with such rectification of securities, he is required to obtain arbitration awards for invalid rectification from the Clearing & Settlement Deptt. on T+5 day and submit the shares along with the arbitration award to the Clearing House on the same day.

This is known as " Patawat Objection Cycle" and the entire process takes further 2/3 days after the securities in physical form are received by the buying or receiving member-brokers in pay-out.

The following table summarizes the activities involved in the Patawat Objection Cycle of CRS in terms of Day-wise activity.

• T + 2 - Pay-out of securities of Rolling Settlement

• T + 3 Patawat Arbitration session : Arbitration awards to be obtained by Receiving member-brokers from the officials of the Clearing & Settlement Dept. Securities under objection to be submitted in the Clearing House. The delivering member-brokers to collect such securities under objection from the Clearing House. Arbitration awards for invalid objection to be obtained from member-brokers of the Arbitration Review Committee

• T + 4 - Members and custodians to submit rectified securities, confirmation forms and invalid objections in the Clearing House. Rectified securities delivered to the Receiving member-brokers

• T + 5 - Arbitration Awards for invalid rectification to be obtained from officials of the Clearing & Settlement Deptt. Securities to be lodged with the Clearing House

The transactions pertaining to un-rectified and invalid rectification of securities are directly closed-out by the Exchange as per the formula explained earlier instead of first inviting the auction offers for the same.

The shares in physical form returned under objection to the Clearing House as explained earlier are required to be accompanied by an arbitration award (Chukada) except in certain cases where the receiving member-brokers are permitted to submit securities to the Clearing House without "Chukada" or arbitration award in the following cases:

• Transfer Deed is out of date.

• Cheques for the dividend adjustment for new shares where distinctive numbers are given in the Exchange Notice is not enclosed.

• Stamp of the Registrar of Companies on the Transfer Deed is missing.

• Details like distinctive numbers, transferors names, etc. are not filled, in the Transfer Deeds.

• Delivering member-brokers stamp on the reverse of the Transfer Deed is missing.

• Witness stamp or signature on Transfer Deed is missing.

• Signature of the transferor is missing.

• Death Certificate (in cases where one or more of the transferors is/ are deceased) is missing.

A penalty at the rate of Rs.100/- per Delivery Order is recovered by the Exchange on the delivering member-brokers for delivering shares, which are not in order. In the event a receiving member-broker misuses the facility of submitting shares under objection without "Chukada", a penalty of Rs.500/- per case is charged and the penalty of Rs.100/- per Delivery Order recovered from the delivering member-broker is refunded to him by debiting the receiving member-brokers account.