Dabba Trading Malpractice

Dabba Trading Malpractice

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April 15, 2023

Recently, the National Stock Exchange came up with multiple notices with names of entities that facilitate ‘dabba trading’. The exchange alerted retail investors against subscribing to any of these products that promise to deliver assured/guaranteed/indicative returns as they are legally prohibited. It further stressed that the exchange has never recognised them as certified members.

What is ‘Dabba trading’?

• Implies trading which happens beyond the cognizance of stock exchanges.

• Traders speculate on movement of stock prices without invoking a real transaction. Simply, put, it is a type of gambling that happens around the movement of stock prices.

• In this, the profit of a broker is equal to the loss of an investor and the contrary also holds true. It can be particularly significant during bear markets or bull runs.

• This type of trading is illegal under Section 23 (1) of the Securities Contracts (Regulation) Act (SCRA), 1956. Once convicted, it can attract a fine till Rs. 25 Crore or a prison sentence till 10 years, or both.

Why does ‘Dabba trading’ happen?

• The main aim of this trading is to hide away from the reach of regulatory mechanisms so that transactions are done in cash and the system is carried out using unauthenticated software support.

• This type of trading also happens through sauda (transactional) records, contract notes/cash receipts with bills, kaccha (rough) or informal details or DD receipts as trading proof.

Issues with ‘Dabba trading’

• Dabba traders can escape taxation as there are no correct records of gain or income. Thus, they can avoid paying Securities Transaction Tax (STT) or Commodity Transaction Tax (CTT) on their dealings.

• Dealing in cash also entails that these traders stay off the regular banking system resulting in a loss for the government exchequer.

• The major risks involve high chances of a broker unable to pay back an investor or an entity becomes bankrupt or insolvent.

• It also means that investors do not have a grievance redressal system, dispute resolution system or investor protections which are available in an exchange.

• It may well lead to the generation of ‘black money’ which can embolden a parallel economy thereby leading to risks related to criminal activities and money laundering.

• It has also been noticed that clients have been intimidated for profit payments and default payments by the ‘recovery agents’ of Dabba brokers.

Source - The HINDU