In the world of share transactions, there can be certain cases where on the T+2 day, the buyers do not get the shares they had purchased on the trading day. These failures are known as delivery failures or failures to deliver. This article aims to shed light on the causes behind such instances and explain the mechanisms put in place by exchanges and regulators to resolve them. By understanding the factors contributing to deliver failures and the subsequent steps taken to rectify them, investors can navigate this aspect of share trading more effectively.
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Delivery failures can arise due to a variety of reasons, including administrative errors, technical glitches, and sellers' inability to provide the shares. Here are some common causes:
1. Administrative Errors: Delivery failures may occur due to mistakes in processing share transfers, incorrect entries in the settlement system, or failures in reconciliation processes between parties involved in the transaction.
2. Insufficient Availability: In some cases, sellers may not have the necessary shares in their possession to fulfil the transaction. This can happen if the shares are tied up in other transactions or if there are delays in transferring shares from the seller's account to the buyer's account.
3. Failed Settlement Instructions: Delivery failures can also result from errors in settlement instructions provided by brokers or financial institutions, leading to mismatch or incomplete transactions.
Delivery failures can have significant consequences for both buyers and sellers involved in share transactions. The impacts of delivery failures include:
1. Market Disruption: Delivery failures can disrupt the smooth functioning of the market, leading to price distortions and decreased investor confidence.
2. Investor Frustration: Buyers who do not receive the shares they purchased may experience frustration, as their investment plans may be delayed or disrupted.
3. Regulatory Scrutiny: Exchanges and regulatory bodies closely monitor delivery failures to ensure market integrity. High instances of delivery failures may result in investigations and the implementation of stricter regulations.
To address delivery failures and ensure buyers receive the shares they purchased, exchanges and regulators have established specific mechanisms and procedures. These mechanisms aim to rectify the situation and maintain the smooth functioning of the market. The common methods of resolving delivery failures include:
1. Auctions: One commonly employed method is conducting auctions. In cases of delivery failures, the exchange may organise an auction to buy the required shares from other market participants. The purchased shares are then delivered to the buyer, who experienced the delivery failure. The auction process allows buyers to obtain the shares they intended to purchase, albeit potentially at different prices than originally agreed upon.
2. Penalty Charges: Exchanges and regulators may impose penalty charges on sellers who fail to deliver the shares. These penalties act as a deterrent and encourage sellers to fulfil their obligations promptly. The specific calculation methods for auction rate penalties vary based on factors such as whether the shares are F&O scrips, whether both buyer and seller are clients/members of a particular brokerage, or whether the buyer is a client/member or not.
3. Enhanced Monitoring and reporting: Exchanges and regulators continuously monitor delivery failure rates and enforce reporting requirements for brokers and financial institutions. This proactive approach helps identify patterns, investigate potential misconduct, and implement measures to minimise delivery failures.
4. Strengthening Settlement Processes: Exchanges and regulators work to enhance settlement processes, improve reconciliation mechanisms, and streamline share transfer procedures. These efforts aim to reduce the occurrence of delivery failures by addressing underlying system issues and promoting efficient settlement practices.
As an investor, it is essential to communicate promptly with Motilal Oswal’s team if you encounter a delivery failure. We will provide you with specific information regarding the status of your transaction and guide you through the resolution process. It is crucial to maintain clear documentation of the transaction details, including trade confirmations and settlement instructions, which can be helpful in resolving any disputes or discrepancies.
Additionally, you should be patient and trust the process. Ideally, the exchanges and regulators settle this discrepancy by the end of the T+2 day and the shares are transferred to the buyer on the T+3 day.