Dabba Trading and its Economic Impact

The National Stock Exchange (NSE) has issued a series of letters to regular investors warning them about businesses engaging in “dabba trading.”
The NSE warned investors not to subscribe to or invest in products that offer indicative, certain, or guaranteed returns in the stock market since they are illegal.
The exchange does not recognise dabba trading entities as authorised members.

Dabba (Box) trading refers to informal trading that takes place outside the purview of the stock exchanges.
It entails betting on stock price changes without committing to an actual transaction to acquire physical ownership of a certain stock, as is done in an exchange.
Simply put, it is gambling concentrated on stock price swings.

Dabba trading involves investors betting on stock price changes at a specific price point.
They profit if the price point rises; if it decreases, they must pay the difference to the dabba broker.
The broker profits off the loss of the investor, and vice versa.
Transactions are facilitated utilising cash and unrecognised software terminals or informal records, allowing merchants to operate outside of the regulatory framework.

Dabba dealers are able to avoid taxation since they do not keep accurate records of income or gain, resulting in a loss to the government exchequer.
Because they use cash, they are also outside the purview of the traditional banking system.
Investors in dabba trading lack official protections for investor protection or grievance redressal channels within an exchange, leaving them vulnerable to broker defaults or insolvency.
Dabba trade also sustains a parallel economy, perhaps fostering the growth of black money and criminal activity.

According to industry experts, dabba brokers pressure clients for late payments and withhold profit payments.
Potential investors are drawn in by aggressive marketing, the convenience of trading through apps with user-friendly interfaces, and the lack of identity verification.
Brokers negotiate their fees and margins based on an individual’s trading profile.
When dabba brokers try to hedge their exposures, the process might possibly produce volatility and losses for the regulated bourse.

Section 23(1) of the Securities Contracts (Regulation) Act (SCRA) of 1956 defines dabba trading as a crime.
If convicted, it can result in imprisonment for up to ten years or a fine of up to Rs. 25 crore, or both.

Source: https://www.thehindu.com/business/explained-what-is-dabba-trading-and-how-does-it-affect-the-economy/article66733211.ece