Short delivery is a situation that occurs when the seller of a stock fails to deliver the shares to the exchange for the buyers demat account. This generally happens when intraday short positions cannot be closed due to illiquidity or stocks hitting the upper circuit. The consequences of short delivery are different for the buyer and the seller. Buyers are notified through email and a Kite notification when a short delivery happens. A short-delivery tag is also displayed beside the short-delivered stock. The shares will be credited to the buyer’s demat account on T+2 day after the exchange holds an auction on T+1 day to procure the short-delivered shares. If the exchange cannot procure the shares in the auction, the Zerodha account will be credited with cash based on the close-out price.

It is important to note that short selling a stock for delivery should only be done if the seller has the stock in their demat account. Otherwise, they could end up paying a considerable amount of money as an auction penalty.

In summary, short delivery is a situation that occurs when the seller of a stock fails to deliver the shares to the exchange for the buyers demat account. Buyers are notified when this happens, and the shares will be credited to their demat account on T+2 day after the exchange holds an auction on T+1 day to procure the short-delivered shares.