How to participate in an auction trade on Zerodha

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An auction trade on NSE and BSE is a close-out mechanism triggered when a seller in the equity cash segment fails to deliver shares on the settlement due date (T+1 under the current T+1 settlement cycle). The exchange conducts a buy-in auction, where other market participants can offer the undelivered shares at a premium price, and the defaulting seller bears the penalty. Retail investors on Zerodha can be affected by auction trades in two main ways: as a buyer whose shares were not delivered (the aggrieved party), or as a holder of shares who chooses to participate in the auction by offering their shares at the auction price. The auction market reference article provides the conceptual background; this guide covers the practical steps.

Understanding the auction lifecycle

Under NSE and BSE’s T+1 rolling settlement, shares purchased on Day T must be delivered by the seller by end of Day T+1. If the seller fails to deliver:

  1. T+2: The exchange marks the undelivered quantity as short delivery and schedules a buy-in auction.
  2. Auction session (typically 2:00 PM to 2:45 PM IST on T+2): Other market participants offer the required shares in the auction market at prices up to a permitted ceiling. The exchange buys shares from auction sellers and delivers them to the aggrieved buyers.
  3. Auction settlement: The original defaulting seller is charged the auction settlement price (which is typically a penalty price above the market rate). If no shares are offered in the auction (no market participants sell in the auction), the exchange performs a cash close-out.
  4. Cash close-out: If the auction fails to procure shares, the exchange credits the aggrieved buyer with a cash payment calculated at the close-out price (the higher of 20% above the closing price on T+1 or the highest price during the settlement period). The buyer does not receive the shares in this case.

The auction price is always at a penalty premium compared to the normal market price, which is why some shareholders choose to participate in auctions.

Scenario 1, You are the aggrieved buyer (short delivery received)

If you purchased shares and the original seller defaulted, you will receive a communication from Zerodha (email and/or Kite notification) stating that your purchase is in short delivery and will be resolved through the auction or cash close-out.

Action required from you: None, Zerodha and the exchange handle the process.

On T+2, the exchange conducts the auction. Depending on the outcome:

  • If auction shares are found: The shares are credited to your demat account, typically on T+3. The auction price is borne by the defaulting seller, not by you.
  • If no auction shares are found (close-out): The exchange credits a cash compensation to your Zerodha account. The close-out amount is typically higher than your original buy price (since the penalty price is above market), so cash close-out often results in a small profit for the aggrieved buyer. However, you do not receive the shares.

Monitor your Console account under Reports for the credit entry. Contact Zerodha support if you do not see the credit by T+3.

BTST risk and auctions

The most common scenario where retail Zerodha investors encounter auction situations is BTST (Buy Today Sell Tomorrow) trades in illiquid stocks. If you bought on Day T and sold on Day T+1 (BTST), and the original seller from your Day T buy defaults, your Day T+1 sell creates a chain: you must deliver shares on T+2 for your sell, but you did not receive shares from your T buy. Zerodha bridges this settlement, but you may be subject to close-out charges if shares cannot be obtained.

Scenario 2, You want to offer shares in the auction (auction seller)

If you hold shares of a scrip that has an active auction, you can participate in the auction by offering your shares at the auction price. This is an opportunity to sell at a premium above the normal market price.

Important: Participation as an auction seller requires specific action through Zerodha, and the process is not fully self-service within the Kite platform. The steps below reflect the current process.

Step 1, Identify an active auction

Zerodha publishes auction schedules on its support portal. NSE also publishes the auction list (scrips with short delivery going to auction) on its website typically by 11:00 AM on the auction day (T+2). Check the NSE website under Market Data > Auction > Auction Market for the current day’s auction list.

Step 2, Contact Zerodha before the auction session

If you want to offer shares in an auction, contact Zerodha’s support team before 1:30 PM IST on the auction day via the support portal (support.zerodha.com) or in-app chat. Inform them of:

  • The scrip you want to offer.
  • The quantity you want to offer.
  • Your confirmation that you hold the shares in your demat account (free of any pledge or lock).

Zerodha’s dealing desk will place the auction sell order on your behalf during the auction session (2:00 PM to 2:45 PM IST).

Step 3, Auction execution

During the auction session, Zerodha’s dealing desk enters your sell order in the NSE/BSE auction market. The auction operates as a call auction: all sell orders are matched with the required buy quantity at the clearing corporation-determined auction settlement price.

Step 4, Receive auction proceeds

After the auction session closes (typically by 3:30 PM IST on the auction day), Zerodha receives the auction sale proceeds. The amount is credited to your account by the end of the clearing cycle. The credit appears in your Kite funds page and Console account.

Auction settlement price

The NSE and BSE compute the auction settlement price as:

  • The highest of (a) 20% above the closing price of the scrip on T+1, or (b) the highest traded price from the settlement period (T to T+1).

This premium is why auction participation can be attractive for holders: you sell at a guaranteed premium to the recent market price.

What can go wrong

  • No auction occurs because the exchange procures shares through other mechanisms. Not all short deliveries result in a visible auction. The exchange may source shares internally or from other settlement pools.
  • Cash close-out instead of share delivery. If no auction sellers are found, you receive cash compensation rather than the shares. While the cash amount is calculated at a penalty price, you may have wanted the shares for a longer hold. Plan for this possibility before engaging in BTST with illiquid scrips.
  • Auction participation request too late. If you contact Zerodha after 1:30 PM IST on the auction day, the dealing desk may not be able to process your participation.
  • Shares are pledged. Pledged shares cannot be offered in the auction without unpledging first. Ensure your shares are free of any pledge or lock before requesting auction participation.

References

  1. Zerodha Support, Auction trades, what happens when there is a short delivery, support.zerodha.com.
  2. NSE India, Auction market, regulations and procedures, NSCCL circular, nseindia.com.
  3. BSE India, Settlement of auction trades, bseindia.com.
  4. SEBI, Circular on close-out procedures for short deliveries, SEBI/MRD, sebi.gov.in.

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