Dabba Trading

Subject : Economy

Concept :

The National Stock Exchange (NSE) issued a string of notices naming entities involved in ‘dabba trading’.

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.
It is gambling centred around stock price movements.
‘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.

Aim and purpose:

The primary purpose of such trades is to stay outside the purview of the regulatory mechanism.
Transactions are facilitated using cash and the mechanism is operated using unrecognised software terminals.
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.

Challenges:

Tax evasion:
- 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.
- All of it combined results in a loss to the government exchequer.
Associated risks:
- 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.
Menace 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.
Harassment:
- On entering the dabba ecosystem, the clients were harassed by the broker’s ‘recovery agents’ for default payments and refused payments upon profit.