Dabba Trading: Dabba Trading refers to a form of informal trading that occurs outside the regulated framework of stock exchanges. Dabba Trading is also important for UPSC Prelims Exam 2023 and UPSC Mains Exam (GS Paper 3- Indian Economy)
Over the course of the last week, the National Stock Exchange (NSE) has released several notifications identifying individuals or groups that have been participating in “dabba trading”.
The term “dabba trading” refers to a form of informal trading that occurs outside the regulated framework of stock exchanges. In this type of trading, traders speculate on the movement of stock prices without actually making a real transaction to take physical ownership of a particular stock, which is a standard practice in the exchange. In essence, dabba trading can be thought of as a form of gambling that revolves around predicting stock price movements.
Consider an investor who places a wager on a stock at a particular price point, let’s say ₹1,000. If the price point increases to ₹1,500, the investor would earn a profit of ₹500. However, if the price point drops to ₹900, the investor would have to pay the difference to the dabba broker. As a result, the broker’s profit is equivalent to the investor’s loss, and vice versa. The impact of these equations is particularly significant during bullish or bearish market conditions.
Important concerns with the dabba trading are listed below-
The main objective of dabba trading is to avoid regulatory oversight. To achieve this, transactions are typically conducted using cash, and unregistered software terminals are utilized to facilitate the trades.
The lack of proper documentation regarding income or gains in dabba trading enables traders to evade taxation, thereby avoiding payment of the Commodity Transaction Tax (CTT) or Securities Transaction Tax (STT) on their transactions.
The use of cash and lack of auditable records in dabba trading could promote the emergence of “black money” and the growth of a shadow economy.
The main risk associated with dabba trading is the potential for the broker to default on payments to the investor or for the entity to become insolvent or bankrupt.
According to an industry expert who wished to remain anonymous, clients who enter the dabba trading ecosystem are subjected to harassment by the broker’s “recovery agents” if they default on payments.
The source also revealed that aside from tax evasion, potential investors are attracted to the aggressive marketing strategies, user-friendly trading apps with quality interfaces, and the lack of identity verification requirements.
Under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA) of 1956, dabba trading is considered a punishable offence. Conviction for such an offence can result in imprisonment for up to 10 years, a fine of up to ₹25 crore, or both.
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Dabba trading refers to an informal form of trading in which traders bet on stock price movements without actually buying or selling stocks on a recognized exchange.
No, dabba trading is not legal in India. It is recognized as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA) of 1956.
Dabba trading is facilitated using unregulated software terminals or informal records such as sauda books, challans, DD receipts, and cash receipts.
Since dabba trading is not regulated, there is no investor protection, dispute resolution mechanism, or grievance redressal mechanism available for investors. There is also a risk of default by the broker, bankruptcy, or insolvency of the entity.
Yes, dabba trading can lead to tax evasion since transactions are facilitated using cash, and there are no auditable records of income or gains. As a result, traders can avoid paying Commodity Transaction Tax (CTT) or Securities Transaction Tax (STT).
Dabba trading is a punishable offence under the Securities Contracts (Regulation) Act (SCRA) of 1956. Conviction for such an offence can result in imprisonment for up to 10 years, a fine of up to ₹25 crore, or both.
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