When does cash settlement happen to close out short delivery?

Cash settlement for short delivery is typically initiated by the stock exchange on the trading day following the trade date. This process is called "auction" and is used to clear any short positions that have not been covered by the end of the trading day. During the auction process, the exchange matches buyers and sellers to settle the trade at a price determined by the exchange. The short seller is required to deliver the securities or cash equivalent to the buyer, and any loss incurred is debited from the short seller's account. This process ensures that all trades are settled in a fair and timely manner.

For Ex.:

• Let's say a short seller sells 100 shares of reliance on Monday but fails to deliver the shares by the end of the trading day.
• On Tuesday, the exchange conducts an auction to close out the short position. The auction price for reliance shares is Rs 2400 per share. While the Short seller shorted at Rs 2000.
• The short seller is required to deliver 100 shares of reliance or Rs 2,40,000 (2400 x 100) in cash to the buyer.
• The short seller incurs a loss of Rs 40,000 [(2400-2000) x 100] on reliance (the difference between the auction price and the price at which they sold the shares).
• On the auction day cash settlement always happens at whichever is higher of following:
  1. The closing price on auction day + 20%
  2. Highest price of the stock from trading day till auction date.