Short Delivery Across a Bonus Record Date
On 3 March, Broker A sells 25,000 shares of Indus Textiles to Broker B on PSX; settlement is T+2, 5 March. The company has announced a 20% bonus issue with book closure on 7 March; the ex-bonus date is 6 March. Broker A's client fails to deliver the shares to Broker A's CDC account by the 5 March deadline because the shares are still pledged to a bank and the release instruction was submitted late. CDC records show a free balance of 0 shares in Broker A's client account on 5 March. Broker B's buying client was expecting the shares and the bonus. On 5 March the cum-entitlement price is PKR 118; on 6 March, the ex-date, it opens at PKR 98. NCCPL initiates a buy-in on 8 March at PKR 98. The bonus shares are credited to Broker A's client on 10 March because the client remained the recorded holder on the record date.
1. Who is entitled to the 5,000 bonus shares, and what compensation should Broker B claim?
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Entitlement follows the CDC record on the record date, 7 March. Broker A's client was still the recorded holder because delivery failed and the buy-in settled on 8 March, so the 5,000 bonus shares (20% of 25,000) were correctly credited to that client. Broker B's client bought cum-entitlement at PKR 118 and should receive the economic benefit. The loss is 5,000 shares × PKR 98 = PKR 490,000. The buy-in at PKR 98 versus the contract price of PKR 118 reflects the ex-bonus adjustment: the defaulting seller gains PKR 20 per share (PKR 500,000) on the original contract, which is the same loss viewed from the price side. Broker B should claim the 5,000 shares or PKR 490,000, not both the shares and the full price difference.
2. What operational controls failed, and what should Broker A have done before 5 March?
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The pledge release was initiated too late; the member did not monitor the corporate action calendar or CDC free balance, and no pre-settlement shortage alert was raised. Before 5 March, Broker A should have diarised the record date and ex-date, confirmed free versus pledged positions at T-2, submitted the release with the bank well before the settlement cut-off, and arranged borrowing or bought shares to cover if release was uncertain. It should also have notified NCCPL and Broker B as soon as the shortage was foreseeable, and prepared a contingency for the bonus entitlement. Waiting until the settlement date turned a predictable custody issue into a default and a compensation claim.
3. Should NCCPL have waited until after the record date to buy in? Discuss the trade-off.
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Buying in before the record date would have put shares in the buyer's CDC account and preserved the bonus entitlement, avoiding a separate compensation claim. But if the shortage is identified only on the settlement date, a pre-record-date buy-in may not be operationally possible. A buy-in after the record date is simpler but shifts the entitlement to the seller and creates a claim. The rulebook's promptness requirement and the need to avoid market disruption usually favour buying in as soon as the fail is confirmed, even after the record date, provided a compensation mechanism exists so the buyer is not left with the ex-price shares but no bonus.