‘Dabba trading’ and it effect on the economy

(MainsGS2:Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.)

Context:

• Recently, 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.

About dabba trading:

• 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.

• 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, thus it signifying as 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 to the investor’s loss and vice-versa.

Purpose of such trading:

• 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 unrecognized 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.

Issues involved:

• 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, thus resulting 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.

Ease of trading:

• Other than taxation 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 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).