DABBA TRADING

Disclaimer: Copyright infringement not intended.

Context

• 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. In simple words, it is gambling centered around stock price movements.

Understanding through an example

• For example, an investor places a bet on a stock at a price point, say ₹1,000. If the price point rose to ₹1,500, he/she would make a gain of ₹500. However, if the price point falls to ₹900, the investor would have to pay the difference to the dabba
• Thus, it could be concluded that the broker’s profit equates the investor’s loss and vice-versa.

Motive

• The primary purpose of such trades is to stay outside the purview of the regulatory mechanism, and thus, transactions are facilitated using cash and the mechanism is operated using unrecognised software terminals.
• Other than this, 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.

Dabba Trading: Key pointers

1. It is an unauthorized pseudo-stock market with its own set of rules. It is illegal and not regulated by the market regulator.
2. It is carried out by persons not registered with SEBI and transactions are in cash.
3. It is active in the equity markets with shares linked to listed equity shares and commodity markets.
4. The operator acts as the stockbroker and puts the order of the trade in his book as the stock exchange and collects money. The counterparty is liable to pay for profits.
5. There is no guarantee of settlement of transactions and these carry a significant risk of losing money 

Concerns

• 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.  
• 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.
• 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.

Conclusion

• Dabba trading is the method to convert black money into white by taking large positions in the market and settling later with cash.
• The government has to put strict rules and regulations for the control of Dabba trading in India.

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