Central idea

The National Stock Exchange (NSE) has issued a series of notices warning retail investors about entities involved in ‘dabba trading’.
The NSE cautioned investors not to subscribe or invest using these products offering indicative, assured or guaranteed returns in the stock market as they are prohibited by law.
The entities involved in dabba trading are not recognized as authorized 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.
It involves betting 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.

In dabba trading, investors place bets on stock price movements at a certain price point.
If the price point rises, they make a gain, and if it falls, they have to pay the difference to the dabba broker.
The broker’s profit from the investor’s loss, and vice versa.
Transactions are facilitated using cash and unrecognised software terminals or informal records, which helps traders stay outside the regulatory mechanism.

Since dabba traders do not maintain proper records of income or gain, they are able to escape taxation, which results in a loss to the government exchequer.
The use of cash also means that they are outside the purview of the formal banking system.
Investors in dabba trading do not have formal provisions for investor protection or grievance redressal mechanisms available within an exchange, which exposes them to the risk of broker defaults or insolvency.
Dabba trading also perpetuates a parallel economy, potentially encouraging the growth of black money and criminal activities.

Industry observers have reported that dabba brokers harass clients for default payments and refuse payments upon profit.
Potential investors are lured by aggressive marketing, ease of trading using apps with quality interfaces, and lack of identity verification.
Brokers keep their fees and margins open to negotiation depending on an individual’s trading profile.
The mechanism could potentially induce volatility and cause losses for the regulated bourse when dabba brokers look to hedge their exposures.

Dabba trading is recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956.
Upon conviction, it can invite imprisonment for a term extending up to 10 years or a fine up to ₹25 crore, or both.