I shorted shares in MIS but I wasn’t able to square off the positions because the stock hit upper circuit limit. I saw later that I was charged for this. Could someone explain why?
If you sell a stock and can’t buy it back for any reason, it is called short delivery. Which means you would have sold stocks which you can’t deliver to the person who bought it from you. In which case the exchange buys it back on your behalf by conducting an auction two days after you sold it. The price at which the stock is bought back and your selling price will be your losses. This is the extra debit amount you are seeing.
We would have sent an auction note to your email. Do check it out. For more read this post on the consequences of short delivery.
Is this why people say we shouldn’t short illiquid stocks?
That’s right.
That seems to be gaining opportunity for stocks hitting lower circuits on daily basis eg Vakrangee 
I had short sell through MIS order 7000 shared at 460 rupees in VIP industries,but the stock hits upper circuit,so that Couldn’t able to square off the position.My account opening balance is around 5.7lakhs but now showing -89k.May I know the leverage and penalties for the short sell.When the auction finalised amount can be settled into demat amount??.
You can check out this post to learn all about short delivery:
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