As dabba traders move to give their illegal activities a garb of professionalism by using online ads and structured apps, the National Stock Exchange (NSE) has come up with notices warning investors to steer clear of 'dabba trading' and such traders.
NSE recently cancelled the registration of two traders — Narendra V Sumaira and Shantilal Nagda — in this regard. The exchange had earlier warned investors to avoid transacting with Shri Parasnath Commodity Private Limited, Shri Parasnath Bullion Private Limited, Faary Tale Trading Private Limited, and Bharat Kumar (associated with Trade with Trust).
What is dabba trading?
Dabba trading is also known as box trading or bucket trading. It refers to an illegal practice of trading that takes place outside the purview of stock exchanges. Some traders and brokers bet on stock price movements without incurring a real transaction to take physical ownership of a particular stock. Simply put, it is gambling centred around stock price movements.
For example, an investor places a bet on ABC stock at a price of Rs 1,000. If the price goes up to say Rs 1,500, the investor would make a gain of Rs 500. However, if the price falls, the investor would have to pay the difference to the dabba broker. However, you never actually bought or sold the stock. Hence, it is clear that the broker’s profit is equal to the investor’s loss and vice-versa.
Also Read | NSE cautions investors against dabba trading; cancels registration of two people in the matter
And, all these dabba transactions are settled in cash, leaving no trail. The traders are not registered with the Securities and Exchange Board of India (SEBI) either.
Now mostly, investors do not make a profit in the short-term in stock trading. But if they do, there have been instances of brokers running away with the money. Because all of this is happening outside of the exchanges, there is no redressal available to the investors.
Why do investors get into dabba trading then?
The biggest lure of this practice is avoiding taxation.
When you invest via legalised stock exchanges, you pay certain fees and taxes like the Commodity Transaction Tax (CTT) or the Securities Transaction Tax (STT). All these taxes are evaded in dabba trading. And because the transactions happen in cash without any record, this practice can lead to the growth of black money that can be used for other criminal activities.
With the rise of dabba trading apps, some unsuspecting investors are also getting involved in such illegal trading practices.
What are the consequences of dabba trading?
Dabba trading is recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956.
In addition to being violative of the securities laws, dabba trading falls within the purview of Sections 406, 420 and 120-B of the Indian Penal Code, 1870.
Upon conviction, investors and traders can face imprisonment for a term extending up to 10 years or a fine up to Rs 25 crore or both.
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