How does “Dabba trading” affect the economy? 2023

The National Stock Exchange (NSE) has issued a series of notices designating entities implicated in “dabba trading” over the past week. As these products offering indicative/guaranteed/guaranteed returns on the stock market are prohibited by law, the bourse warned retail investors not to subscribe (or invest) in them. It added that the exchange does not recognize the entities as authorized members.

What is ‘dabba trading’?

Dabba (box) trading is informal trading that occurs outside of the stock exchanges’ jurisdiction. Traders speculate on stock price movements without actually acquiring physical ownership of a stock, as is the case on an exchange. Simply put, it is a form of wagering centered on stock price fluctuations.

For instance, an investor may place a wager on a stock at a certain price, say 1,000. If the price increased to 1,500, he or she would gain 500. However, if the price declines to 900, the investor would be responsible for compensating the dabba broker for the difference. Therefore, it is possible to conclude that the broker’s profit is equivalent to the investor’s loss and vice versa. The equations are especially significant during bull markets and bear markets.

The primary objective of such transactions is to remain outside the regulatory mechanism’s jurisdiction, so cash is used to facilitate transactions and unrecognized software terminals are used to operate the mechanism. In addition, informal or kaccha (rough) documents, sauda (transaction) journals, challans, DD receipts, cash receipts, and bills/contract notes could be used as evidence of trading.

Where does it become especially troublesome?

Since there are no accurate records of income or gain, dabba traders can avoid paying taxes. On their transactions, they would not be required to pay the Commodity Transaction Tax (CTT) or the Securities Transaction Tax (STT). The use of cash also excludes these transactions from the formal banking system. All of it contributes to a loss for the government treasury.

The primary risk associated with “dabba trading” is the possibility that the broker will fail to pay the investor or that the entity will become insolvent or defunct. Being outside the regulatory jurisdiction means investors lack formal provisions for investor protection, dispute resolution mechanisms, and grievance redress mechanisms that are available on an exchange.

Since all transactions are conducted in cash and there are no auditable records, it has the potential to foster the development of ‘black money’ and perpetuate a parallel economy. This could potentially result in money laundering and other illicit activities.

How does the scenario appear?

Under the condition of anonymity, an industry observer verified to The Hindu that, upon entering the dabba ecosystem, their clients were tormented by the broker’s’recovery agents’ for default payments and refused payment upon profit.

According to the source, besides taxation, what attracts potential investors is their aggressive marketing, the simplicity of trading (using applications with a quality interface), and the absence of identity verifications. The fees and margins of brokers are negotiable based on the client’s trading profile, observable volumes, and market trends.

The source indicated that the mechanism could have ripple effects on the regulated bourse by inducing volatility when dabba brokers attempt to hedge their exposures (take a position in an alternative asset or investment to reduce the risk/loss associated with the present position). It also contributes to the bourse’s loss of volumes, “even if they are not substantial.”

According to Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956, “Dabba trading” is an offense punishable by imprisonment for up to 10 years or a fine of up to 25 crore, or both, upon conviction.

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