Dabba Trading

Why in news?

• Recently, National Stock Exchange (NSE) issued a string of notices naming entities involved in “dabba trading”.

About Dabba Trading:

• Dabba trading is a form of informal trading that takes place outside the purview of the stock exchanges.
• In this practice, 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.
• This results in gambling centred around stock price movements, which is illegal and unregulated.
  • 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 broker.
• Thus, it could be concluded that the broker’s profit equates the investor’s loss and vice-versa. The equations are particularly consequential during bull runs or bear market.
• It 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.

Issues involved:

• Transactions are facilitated using cash and the mechanism is operated using unrecognised software terminals, which helps dabba traders escape taxation.
• The use of cash means that they are outside the purview of the formal banking system. It results in a loss to the government exchequer.
• 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.
• The primary risk entails the possibility that the broker defaults in paying the investor or the entity becomes insolvent or bankrupt.
• It could potentially encourage the growth of ‘black money’ alongside perpetuating a parallel economy, which could lead to risks entailing money laundering and criminal activities.

PRACTICE QUESTION:

The term ‘Dabba Trading’, recently seen in news, refers to:

(a) A form of informal trading that takes place outside the purview of the stock exchanges

(b) Illegal practice of trading on the stock exchange to one's own advantage through having access to confidential information.

(c) Rules and methods for trading within and between enterprises under common ownership or control

(d) An obligatory agreement between a buyer and seller for trading of derivatives according to the agreement

Answer