Valuation debit

When a member does not deliver the securities it owes on settlement day, the clearing corporation cannot simply wait and hope the shares turn up. It has to protect the buyer immediately.

So it debits the defaulting member with a rupee amount standing in for the missing shares. That debit — the shortfall quantity multiplied by a price the clearing corporation itself sets — is the valuation debit. It is a placeholder, charged on pay-in day itself, before the shortage is actually cleared up through a buy-in auction later.

The workbook (Chapter 3, Table 3.1, and Chapter 6, sections 6.3.4 and 6.5) places the valuation debit at the pay-in stage of the settlement cycle: the typical T+1 rolling settlement activity schedule lists "Valuation Debit — T+1 working day," alongside securities and funds pay-in, and specifically in case of non-delivery of securities.

Mechanically: once shortages in delivery are identified, members are debited by an amount equivalent to the securities not delivered, valued at a valuation price — this is the valuation debit. Chapter 6's funds-shortage provisions treat this debit as part of a member's funds obligation: a member failing to fulfil its funds obligations — which explicitly includes the valuation debit raised on account of securities shortages — by the scheduled time can have its trading facility withdrawn.

The valuation debit is not the end of the story for the shortage itself: the clearing corporation separately runs a buy-in auction to actually source the missing securities from the market, and if that fails, applies close out instead. The valuation debit is the immediate funds-side placeholder that runs alongside, and is later trued up against, that auction or close-out process.

A trading member owes 1,200 shares of a stock to the clearing corporation on pay-in day, T+1, but delivers only 700 shares — a shortfall of 500 shares.

The clearing corporation fixes a valuation price of Rs 240 for that security for this settlement.

Valuation debit = 500 shares x Rs 240 = Rs 1,20,000

The member is debited Rs 1,20,000 on T+1 itself, immediately, as if it had failed to pay in that amount of funds — even though the underlying problem is a shortage of shares, not of money. If the member fails to make good this valuation debit by the scheduled time, along with any other funds obligations, its trading facility can be withdrawn. Separately, the clearing corporation runs a buy-in auction to actually source the missing 500 shares from the market and deliver them to the buyer, with the valuation debit reconciled against the outcome of that auction.

Chapter 3's settlement cycle table names the valuation debit as a distinct T+1 activity, and Chapter 6 (sections 6.3.4 and 6.5) explains what triggers it and how it is treated as a funds obligation. Expect it tested as the immediate consequence of non-delivery on pay-in day, distinct from the buy-in auction that follows.

• The valuation debit is charged on pay-in day itself, as soon as a shortage is identified — it is not the outcome of the buy-in auction, which happens afterwards.
• It is treated as a funds obligation, so failing to make it good has the same consequence (possible withdrawal of trading facility) as failing to pay in funds directly.
• It is based on a valuation price the clearing corporation fixes, not the original trade price or the client's cost.
• Do not confuse the valuation debit (an immediate funds-side charge for a shortage) with the buy-in auction (the process of actually sourcing the missing shares) or close out (what happens if the auction itself fails to find sellers).