What happens when the DIS gets rejected?
The DIS could get rejected for a number of reasons and we shall look at that separately. For now let us focus on what happens in most cases when the DIS gets rejected. Since Indian markets operate on a T+2 rolling settlement bases, the DIS has to be mandatorily submitted to the broker before the first half of T+1. It is always better to submit the DIS on the day of the trade so that if there is any problem in the DIS, the broker can inform you and you have enough time to rectify the same.
But sometimes that may not be possible. In such cases, you end up with short delivery. When the delivery is short, the stocks go into auction where it is sold to the highest bidder. If your DIS gets rejected, your biggest challenge is if the stock prices shoots up in the next few days. That is when you end up making huge losses on the auction.
But, why does the DIS get rejected?
There are a variety of reasons for the DIS getting rejected.
- The ISIN number of the stock may have wrongly written
- There could be a mismatch between number of shares in words and figures
- A market transaction may have been ticked as an off-market transaction or vice versa
- Signature on the DIS may not match with the signature in the DP master
- Seller may not have sufficient shares in demat to sell the stock
- The stock balance may exist in demat but may be under dispute, lien or court order
- There could be overwriting on the DIS, in which case it is rejected
Off market transfers are done from one demat account to another outside the stock exchange system. For example, a father may want to gift shares to his daughter and this can be done through an off-market transfer using DIS. Alternatively, you may consolidate multiple demat accounts into a single demat account. In this case, you can give a DIS to the various DPs to transfer into a single account.
Rectification of DIS rejections is much simpler in off-market transfers. That is because there is no exchange triggered auction risk in these transfers. At the most, there may be a technical error in your application or a mismatch between words and figures. In such cases, the DP normally calls you to come to the DP office to rectify the error. However, if your DIS gets rejected due to insufficient balance or lien on shares, then DP may levy a penalty.
How to handle DIS rejection in market trades
This is the more complicated part of handling DIS rejections since there is a time limit. Ideally, you must submit your signed DIS to the broker on the trade day so that you have time for rectifications, if required on T+1 date. It is always advisable to complete the rectification latest by 11 am on T+1, so that there are no delays in uploads. If you fail to do so, then the shares could go into auction.
When the shares go into auction, there are two likely situations. Firstly, the price of the stock may have fallen after you sold. In that case, you may not have to pay any auction losses. However, any gains on covering the position will not accrue to you but will be transferred to Investor Protection Fund.
What do you do if the price has gone up and the stock goes into auction due to DIS rejection? This gets a tad complicated but there are two options in front of you. Firstly, you can request the broker if the debit can be adjusted. In the case of stocks with substantial liquidity, such an adjustment is often possible and you need not worry about auctions. However, if you are not able to adjust the debit, then the stock goes into auction and you will be liable to bear the losses. The answer is to double check your DIS thoroughly before submitting the same to your broker.