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

April 14, 2023 

Why is the NSE clamping down on ‘dabba’ traders? How does the informal trading ecosystem evade taxation?

The story so far: In the past week, the National Stock Exchange (NSE) issued a string of notices naming entities involved in ‘dabba trading’. The bourse 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. It added that the entities are not recognised as authorised members by the exchange.

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 an exchange. In simple words, it is gambling centred 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 the investor’s loss and vice-versa. The equations are particularly consequential during bull runs or bear market.

The primary purpose of such trades is to stay outside the purview of the regulatory mechanism, and thus, transactions are facilitated using cash and the mechanism is operated using unrecognised software terminals. Other than this, it could also be facilitated using informal or kaccha (rough) records, sauda (transaction) books, challans, DD receipts, cash receipts alongside bills/contract notes as proof of trading.

Where does it become particularly problematic?

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. All of it combined results in a loss to the government exchequer.

In ‘dabba trading’, the primary risk entails the possibility that the broker defaults in paying the investor or the entity becomes insolvent or bankrupt. 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.

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.

What does the scenario look like?

An industry observer, on the condition of anonymity, confirmed to The Hindu that their clients, on entering the dabba ecosystem, were harassed by the broker’s ‘recovery agents’ for default payments and refused payments upon profit.

Other than taxation, as per the source, what lures potential investors is their aggressive marketing, ease of trading (using apps with quality interface) and lack of identity verifications. Depending on the individual’s trading profile, observable volumes and trends, brokers keep their fees and margins open to negotiation as well.

The source explained that the mechanism could potentially translate into ripple effects for the regulated bourse as well by inducing volatility when dabba brokers look to hedge their exposures (take position in an alternate asset or investment to reduce the risk/loss with the current position). It also contributes to the bourse losing out on volumes, “even though they may not be significant”.

‘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 crore, or both.

THE GIST

• 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 an exchange.
• 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.
• ‘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 crore, or both.

[The Hindu]