Once a seller is unable to deliver the shares on settlement day, the exchange marks this as a short delivery, which then enters the auction market.What happens now?
The stock exchange found that sellers could not deliver more than 30 lakh shares. These shares were purchased during the auction session, where the exchange acquired missing shares from other market participants at a premium if necessary. The costs of that premium are passed on to the defaulting seller.
Because supply is tight and shares have risen sharply, analysts say auction prices tend to be higher than the normal market price, meaning short sellers may have suffered heavy losses.Why did this happen?Groww shares have risen almost 89% above the IPO price and more than 60% above the listing price in just a few days. With stocks hitting new highs, many traders likely expected a correction and took short positions or BTST trades that failed.
Add to that the fact that Groww’s float is small, and the risk of short squeeze-like conditions grows. A low float means that demand can more easily overwhelm supply. Once stocks become scarce, anyone who sells without owning shares will be trapped.
A little background
Groww’s current market capitalization has crossed Rs 1.15 lakh crore, compared to around Rs 61,000 crore at IPO prices, a jump that many analysts call potentially too long.
Vipul Bhowar, Senior Director & Head of Equities at Waterfield Advisors, says Groww’s ability to rapidly grow and monetize users has delivered tech-style valuations far higher than rivals. “However, brokerage is a cyclical business, and if markets stagnate, revenues could slow significantly. Based on all this, we think Groww’s valuation may be a bit too high and ahead of itself,” he warned.
He added that while technology improves scalability, the discount brokerage remains highly competitive and highly regulated. “Any unfavorable SEBI regulations aimed at protecting retail investors can quickly reduce earnings. Attributing very high multiples to such a cyclical and regulated company may be difficult to justify,” he said.
What happens besides the auction shares of 30 lakh?
During the auction, shares were purchased from other investors who were willing to sell at the auction. If the shares are purchased at a higher price, the difference is recovered from the defaulting seller. The buyer who originally purchased the shares will receive them a day later.
“Groww auction stocks show that short sellers were unable to hedge in time. It’s a stark reminder that going against market momentum can quickly backfire,” Tanna said.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of Economic Times)
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