Dabba Trading: Resurgence, Risks, and Regulatory Challenges

Sub : Eco

Sec: Capital market

Overview of Dabba Trading

Dabba trading is an illegal, off-market trading practice where transactions occur outside recognized stock exchanges like NSE or BSE.
Operation Mechanism:
- Investors bet on stock price movements without actual investments.
- Profits or losses depend on price differences, with no formal execution on the exchange.
- Legal Status: It is banned under the Securities Contracts (Regulation) Act (SCRA), 1956.

Scale of Resurgence

Daily Volumes: Estimated at ₹100 lakh crore per day, equivalent to 20% of the regulated F&O market turnover.
Historical Comparison: Its scale is reminiscent of the 1990s and early 2000s, where it accounted for 33% of overall market trades.
Current F&O Market Turnover:
- October 2024: ₹518.63 lakh crore.

Reasons for Popularity

Lower Entry Barriers:
- No formal paperwork, margin requirements, or taxes/fees.
- Lower lot sizes make it attractive to retail participants.
Speculative Flexibility:
- Offers anonymity and freedom beyond regulated exchanges’ limits.
Regulatory Tightening:
- SEBI’s stricter F&O guidelines (expected to reduce F&O volumes by 40%) have pushed traders to alternative avenues like dabba trading.
Accessible Technology:
- Training software and trading platforms mimicking official exchanges are widely available.
- Simple internet searches for “dabba trading app” yield numerous options.

Risks and Challenges

Investor Vulnerability:
- No grievance redressal mechanism for investors.
- Losses from disappearing dabba traders are irrecoverable, including margin payments.
Economic and Legal Risks:
- Lack of regulatory oversight undermines investor protection and tax revenue.
- Conviction under Section 23(1) of SCRA, 1956 can lead to:
  - Imprisonment: Up to 10 years.
  - Fine: Up to ₹25 crore.
Market Disruption:
- Undermines formal securities markets, impacting legitimate trading volumes and investor confidence.

Regulatory Concerns

Past Actions:
- SEBI conducted its first-ever search and seizure operation in 2003 to curb dabba trading.
Recent Warnings:
- Stock exchanges have cautioned investors to avoid dabba trading or schemes promising assured returns.
Current Monitoring Gaps:
- Increased use of technology and anonymity makes it challenging to track illegal trading platforms.

Recommendations for Addressing Dabba Trading