Explained | What is ‘Dabba trading’ and how does it affect the economy?

Source: The post is based on the article “Explained | What is ‘Dabba trading’ and how does it affect the economy?” published in The Hindu on 14th April 2023

What is the News?

National Stock Exchange (NSE) has issued several notices naming entities involved in ‘dabba trading’. NSE cautioned retail investors to not subscribe (or invest) using any of these products offering indicative/assured/guaranteed returns in the stock market as they are prohibited by law. 

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

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 to the investor’s loss and vice-versa. 

What is the main purpose of doing Dabba Trading?

The primary purpose of dabba trading is to stay outside the purview of the regulatory mechanism, and thus, transactions are facilitated using cash and the mechanism is operated using unrecognized software terminals. 

Dabba trading’ 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 crores or both.

Why is Dabba Trading problematic?

Firstly, 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. 

Secondly, as dabba trading is outside the regulatory purview, this implies that investors are without formal provisions for investor protection, dispute resolution mechanisms and grievance redressal mechanisms that are available within an exchange.

Thirdly, 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.