What is a Buy-in?
Before investing in the stock market, it is essential to know the basics. When you purchase shares, they are transferred to your Demat account within the specified settlement period. Have you ever wondered what happens if there is a delay in settlement or when your purchase order is not fulfilled? This is where buy-in stocks play their part.
What is a market Buy-in in stocks?
A buy-in in financial markets is an event wherein an investor has to repurchase shares because the seller of the original shares did not deliver the securities on time, or did not deliver them altogether.
Global stock markets, like the New York Stock Exchange (NYSE), part of the buy-in process, assign the right to the purchasing party to replace the original transaction. This is done by instructing a third-party, or a buy-in agent to make a transaction of purchase and delivery of the stock. Alternatively, the exchange may even issue a buy-in notice, after which the investor can directly repurchase from another seller. In India however, the stock exchanges – National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), follow a different process of buy-in stock auction, where the exchange auctions the stock to third parties at competitive rates.
A buy-in of stock can also be an indication to an individual or a legal entity purchasing shares or a stake in a company or other holding. In layman's terms, buy-in is the process in which someone joins in with an idea or concept that is not theirs but still appeals to them.
Understanding buy-in stock auction
Both stock exchanges, NSE and BSE, follow the Trading+2 (T+2) rolling settlement system. A certain day’s trading transactions are settled within two working days. In the case of failure of delivery, or short deliveries, the stock exchange provides for a buy-in stock auction. The auction is conducted on the T+2 day itself, whereas the auction settlement is done on the third (T+3) working day.
As soon as the exchange announces an auction, traders and brokers participate by submitting their bids for the short position. In the event of a successful auction, the defaulting trader has to pay the actual auction price plus brokerage fees. A fine can also be imposed. However, if the auction is unsuccessful, the trader who made the original purchase will receive a full refund. The defaulter would then be liable to pay the higher of the two:
The highest current market price on the trading day
20% more than the closing market price of the share on the previous trading day
Benefits of buy-in
The advantage of buy-in stock auction over the appointment of third-party agents is that the auction process is simplified and automated. This not only improves transparency in the entire process but also allows for more liquidity to enter the market. The original buyer also gets the cheapest price. Additionally, the buy-in agent model is cumbersome and exceedingly more time-consuming. It can also be difficult to find an agent, as there is no legal requirement to act as an agent.
Difference Between a Buy-In and a Forced Buy-In
The difference between a typical and forced buy-in is that the latter involves repurchasing shares to cover an open short position. A forced buy-in occurs on a short seller's account if the original lender of the stock recalls it. This can also happen if the broker can no longer borrow shares for the short position. In some cases, an account holder may not be notified before a forced buy-in which is the opposite of a forced sale or a forced liquidation.
Final word
It is extremely important to have a reasonably prudent understanding of the stock market before you begin your trading journey. With a trusted financial partner like IIFL, you can get comprehensive market reports, the latest stock market updates, and financially judicious advice.