DABBA TRADING - ECONOMY
News: What
is 'Dabba trading and how does it affect the economy?
What's in the news?
● In
the past week, the National Stock Exchange (NSI) 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 recognized as authorized members by the
exchange.
What is “dabba trading”?
● Daaba
(box) trading refers to informal trading
that takes place outside the purview of the stock exchanges.
● Traders
hedge 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 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 250). However, if
the price point falls m 90X, the investor would have to pay the difference to
the dabi 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 hull runs or
bear markets.
Why is it becoming popular?
● No taxation
or payment of taxes
● Aggressive
marketing
● Ease
of trading (using apps with quality interface)
● 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.
Issues:
● It
takes place outside the purview of the regulatory mechanism.
● Transactions
are facilitated using cash and the mechanism is operated using unrecognized software terminals.
● 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 (CT) 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.
● Outside
the purview of regulatory mechanisms provides 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.
Regulation and Punishment:
● Dabba
trading is recognized 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.