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.

What is Dabba Trading?

  • 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.

How does it function?

  • 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.

What are the drawbacks of dabba trading?

  • 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.

What is the current state of affairs?

  • 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.

What are the legal consequences?

  • 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.
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