Dabba Trading

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.