What is Dabba Trading?
- Dabba trading is an illegal and unregulated form of trading in securities.
- In dabba trading, traders place deals in securities without the trades actually being executed on any official SEBI-recognized stock exchange.
- These trades are settled internally by the dabba operator and are outside the purview of stock exchanges and regulatory bodies.
- Since trades are not executed on official stock exchange platforms, investors can not use stock exchanges’ grievance redressal mechanisms.
Examples of Bet in Dabba Trading
For example, an investor places a bet on a stock at a price point, say ₹1,000. If the price point rose to ₹1,500, he/she would make a gain of ₹500. However, if the price point falls to ₹900, the investor would have to pay the difference to the dabba broker. Thus, it could be concluded that the broker’s profit equates the investor’s loss and vice versa. The equations are particularly consequential during bull runs or bear markets.
Legality of Dabba Trading
- It is recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956.
- Upon conviction, it can invite imprisonment for a term extending up to 10 years or a fine up to ₹25 crore, or both.
Features of Dabba Trading
The primary purpose of such trades is to stay outside the purview of the regulatory mechanism. These transactions are facilitated using cash, and the mechanism is operated using unrecognised software terminals. Other than this, it could also be facilitated using informal or kaccha (rough) records, sauda (transaction) books, challans, DD receipts, cash receipts, alongside bills/contract notes as proof of trading.
Issues Associated with Dabba Trading
- Escape taxation: Since there are no proper records of income or gain, it helps dabba traders escape taxation. They would not have to pay the Commodity Transaction Tax (CTT) or the Securities Transaction Tax (STT) on their transactions. CTT is a tax levied by the Indian government on certain commodity futures contracts traded on commodity exchanges in India. STT is a tax levied on certain securities transactions, including the sale and purchase of equities, derivatives, equity-oriented mutual funds, and exchange-traded funds (ETFs).
- Risk of entity becoming insolvent or bankrupt: The primary risk entails the possibility that the broker defaults in paying the investor or the entity becomes insolvent or bankrupt.
- Outside the regulatory framework: Being outside the regulatory purview implies that investors are without:
- formal provisions for investor protection,
- dispute resolution mechanisms and grievance redressal mechanisms that are available within an exchange.
- Clients, on entering the dabba ecosystem, were harassed by the broker’s ‘recovery agents’ for default payments and refused payments upon profit.
- Encourage the growth of black money: Since all activities are facilitated using cash, and without any auditable records, it could potentially encourage the growth of ‘black money’ alongside perpetuating a parallel economy. This could potentially translate to risks entailing money laundering and criminal activities.
Cash Transactions
Transactions are facilitated using cash, and the mechanism is operated using unrecognised software terminals, which helps dabba traders escape taxation. The use of cash means that they are outside the purview of the formal banking system. It results in a loss to the government exchequer.
Lack of Security for Investors:
Being outside the regulatory purview implies that investors are without formal provisions for investor protection, dispute resolution mechanisms and grievance redressal mechanisms that are available within an exchange. The primary risk entails the possibility that the broker defaults in paying the investor or the entity becomes insolvent or bankrupt.
Black Money
It could potentially encourage the growth of ‘black money’ alongside perpetuating a parallel economy, which could lead to risks entailing money laundering and criminal activities.
How can Dabba Trading be Prevented?
Strict Enforcement of Laws:
The Securities Contracts (Regulation) Act, 1956, already prohibits ‘dabba trading’ and provides for severe penalties upon conviction. However, these laws need to be more strictly enforced, and culprits should be punished to deter others from engaging in such activities.
Increasing Awareness:
Retail investors need to be educated and made aware of the dangers of ‘dabba trading’. Financial regulators can conduct awareness campaigns and disseminate information about the risks associated with such trades.
Monitoring Social Media and Mobile Apps:
‘Dabba trading’ is often facilitated through mobile apps and social media. Regulators can monitor these platforms and take action against those who promote or engage in them.
Conlusion
Dabba trade offers no benefits of safe and guaranteed trades done on the Stock Exchanges. Therefore, investors should exercise caution and not indulge in dabba trading.
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