What is ‘Dabba trading’ and how does it affect the economy?

• Recently, the National Stock Exchange (NSE) issued a string of notices naming entities involved in ‘dabba trading’.
• The bourse cautioned retail investors to not subscribe (or invest) using any of these products offering indicative/assured/guaranteed returns in the stock market as they are prohibited by law.

What is ‘dabba trading’?

• Dabba (box) trading refers to informal trading that takes place outside the purview of the stock exchanges.
• Traders bet on stock price movements without incurring a real transaction to take physical ownership of a particular stock as is done in an exchange.
• The primary purpose of such trades is to stay outside the purview of the regulatory mechanism, and thus, 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.

Where does it become particularly problematic?

• 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.
• The use of cash also means that they are outside the purview of the formal banking system.

Risk Associated

• In ‘dabba trading’, the primary risk entails the possibility that the broker defaults in paying the investor or the entity becomes insolvent or bankrupt.
• 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.
• 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.

What does the scenario look like?

• People on entering the dabba ecosystem, were harassed by the broker’s ‘recovery agents’ for default payments and refused payments upon profit.
• Other than taxation, what lures potential investors is their aggressive marketing, ease of trading (using apps with quality interface) and lack of identity verifications.
• Depending on the individual’s trading profile, observable volumes and trends, brokers keep their fees and margins open to negotiation as well.
• The source explained that the mechanism could potentially translate into ripple effects for the regulated bourse as well by inducing volatility when dabba brokers look to hedge their exposures.
• It also contributes to the bourse losing out on volumes, “even though they may not be significant”.

Conclusion

• ‘Dabba trading’ is recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956 and upon conviction, can invite imprisonment for a term extending up to 10 years or a fine up to ₹25 crore, or both.