Dabba Trading

Table of Contents

Context: National Stock Exchange (NSE) has issued notices against entities involved in ‘dabba trading’.

What is Dabba Trading?

Dabba or box trading is an informal trading practice that occurs outside the purview of the stock exchanges.
- It involves traders betting on stock price movements without carrying out a real transaction to take physical ownership of a particular stock as is done in an exchange.
- It can be equated to gambling centered around stock price movements.
How is it different?
- In legal trading, it is mandatory for investors to open a demat (dematerialised) account with a broker to buy and sell stocks on the stock exchanges.
Purpose: The main purpose of dabba trade is to stay outside the purview of the regulatory mechanism, and hence, transactions are carried out using cash and the mechanism is operated using unrecognized software terminals.
- Kaccha (rough) records, sauda (transaction) books, challans, DD receipts, cash receipts alongside bills/contract notes are used as proof of trading.
Legal status: ‘Dabba trading’ has been recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956.
- Conviction can attract imprisonment for a term extending up to 10 years or a fine up to Rs 25 crore, or both.

Suppose an investor places a bet on a stock at a price point of Rs 1,000. If the price point rose to Rs 1,500, investor stands to make a gain of Rs 500.
In case the price point falls to Rs 900, the investor would have to pay the difference to the dabba broker.
So it can be said that the broker’s profit equates the investor’s loss and vice-versa.

Price manipulation: Dabba trading has been considered illegal as it involves fraudulent activities, such as price manipulation and insider trading.
Affects investor interests: Since it occurs beyond official stock exchanges, it can cause significant losses for investors who participate in stock trading.
Financial losses to the government: Dabba trading takes place through unofficial channels, without participation of banking channels, it leads to loss of revenues for the government.

Bypass taxation: With no proper records of income or gain, dabba traders can escape taxation associated with stock market trade. They need not pay the Commodity Transaction Tax (CTT) or the Securities Transaction Tax (STT) on their transactions.
Informal banking system: Use of cash means that they are outside the purview of the formal banking system. Control of cash flow is not possible.
Grievance redressal: In case the broker defaults in paying the investor or becomes bankrupt, investors do not have formal provisions for dispute resolution and grievance redressal.
Promotes black money: Since activities are carried out using cash without any auditable records, it could promote growth of ‘black money’.
Criminal activities: Black money allows running of a parallel economy, which is supported through money laundering and other criminal activities.

National Stock Exchange of India Limited (NSE) is one of the leading stock exchanges based in Mumbai. NSE has the distinction of being one of the largest stock exchanges in the world by market capitalization.
NSE was set up by the Government of India, based on the recommendations of the Pherwani committee in 1991.
NIFTY 50 is the flagship index of NSE. NSE was the first exchange in India to implement electronic or screen-based trading in 1994.
Stakeholders: Life Insurance Corporation, State Bank of India, India Infoline Limited and Stock Holding Corporation of India Limited.
NSE is the world’s largest derivatives exchange by number of contracts traded and the third largest in cash equities by number of trades (year 2022).