The National Stock Exchange (NSE) recently issued several notices on the names of entities involved in ‘dabba trading’. , Photo Credit: Reuters
the story So Far: Last week, the National Stock Exchange (NSE) issued several notices naming entities involved in ‘dabba trading’. The Exchange cautioned retail investors not to subscribe (or invest) using any of these products offering indicative/assured/guaranteed returns in the stock market as they are prohibited by law. It states that the entities have not been recognized by the Exchange as Authorized Members.
What is ‘Dabba Trading’?
box (Box) trading refers to informal trading that takes place outside the purview of stock exchanges. Traders place bets on the movement of stock prices without actually transacting to take physical ownership of a particular stock, as is done on an exchange. In simple words, it is gambling centered around the stock price movement.
For example, an investor places a bet on a stock at a price point, say ₹1,000. If the price rises to ₹1,500, he will make a profit of ₹500. However, if the price point drops to ₹900, the investor will have to pay the difference box Broker. Thus, it can be concluded that the broker’s gain is equal to the investor’s loss and vice versa. Equations are especially consequential during a bull run or bear market.
The primary objective of such trades is to remain outside the purview of the regulatory mechanism, and thus, the transactions are facilitated using cash and the mechanism is operated using unaccredited software terminals. Furthermore, it can also be facilitated by using informal or Raw (rough) record, deal (Transaction) Books, Invoices, DD Receipts, Cash Receipts along with Bills/Contract Notes as proof of business.
Where does this become particularly problematic?
Since there is no proper record of income or profit, it helps box Traders escape taxation. They will not have to pay Commodity Transaction Tax (CTT) or 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 this together causes loss to the exchequer.
In ‘dabba trading’, the primary risk entails the possibility that the broker defaults on payments to the investor or that the entity becomes insolvent or insolvent. Being outside the regulatory purview means that investors do not have access to the formal provisions for investor protection, dispute resolution mechanism and grievance redressal mechanism that are available within the exchange.
As all activities are facilitated using cash and without any auditable records, this can potentially encourage the growth of ‘black money’ while simultaneously maintaining a parallel economy. This could potentially translate to risks associated with money laundering and criminal activity.
What does the landscape look like?
This was confirmed by an industry observer on condition of anonymity. Hindu that their customers, upon entering the dabba ecosystem, were harassed by the broker’s ‘recovery agents’ for defaulting on payments and denial of payouts on profits.
Apart from taxation, according to the source, what attracts potential investors is their aggressive marketing, ease of doing business (using apps with quality interface) and lack of identity verification. The brokers also keep their fees and margins open for negotiation, depending on the individual’s trading profile, observable volumes and trends.
The formula explained that the mechanism could potentially translate into ripple effects by inducing regulated exchanges as well as fluctuations when box Brokers want to hedge their exposure (take positions in alternative assets or investments to reduce risk/loss with existing positions). This also contributes to lower exchange volumes, “even if they are not significant”.
‘Dabba Trading’ is recognized as an offense under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956 and on conviction, is punishable with imprisonment of up to 10 years or a fine of up to ₹25 Could crore, or both.