What is ‘Dabba trading’ and how does it affect the economy?


The National Stock Exchange (NSE) has issued a series of notices naming firms implicated in ‘dabba trading’ in the last week. The exchange warned ordinary investors not to subscribe (or invest) in any of these products that offer indicative/assured/guaranteed returns on the stock market since they are illegal. The exchange, it added, does not accept the entities as legitimate members.

Points to Ponder:

  • Dabba trading is a sort of informal trading that occurs outside of the purview of stock exchanges. It is similar to gambling in that it involves betting on stock price changes without incurring an actual transaction to obtain physical ownership of a certain stock.
  • Since dabba trading occurs outside of the regulatory system, traders are exempt from paying the Commodity Transaction Tax (CTT) or the Securities Transaction Tax (STT) on their transactions. Because they use cash, they are also outside of the traditional banking system, making it impossible to detect and regulate their operations. As a result, the government incurs a loss.
  • Dabba traders do not have access to the formal provisions for investor protection, dispute resolution systems, or grievance redressal methods that are accessible on an exchange. This puts investors in danger of losing their capital, especially if the dabba broker defaults or becomes insolvent.
  • Dabba trading can support the emergence of black money and prolong a parallel economy because all transactions are conducted in cash with no auditable records. This increases the likelihood of money laundering and illegal activity.
  • Dabba trading can also cause volatility on the regulated exchange since dabba brokers may hedge their exposures by taking positions in alternative assets or investments, which can have unforeseen repercussions. This might potentially result in volume losses for the regulated bourse.
  • Section 23(1) of the Securities Contracts (Regulation) Act (SCRA) of 1956 defines dabba trading as a crime. If convicted, it can result in imprisonment for up to ten years, a fine of up to 25 crores, or both.
  • Potential investors are drawn to dabba trading because of its aggressive marketing, the convenience of trading, and the absence of identity verification. Investors, on the other hand, should be aware of the risks involved and avoid engaging in such activities to preserve their assets and prevent legal ramifications.
  • To summarise, dabba trading is a risky practice that operates outside of the regulatory framework and has the potential to harm investors, the government, and the official financial system. To protect the integrity of the financial system, it is critical to educate investors about the dangers of dabba trading and to prosecute those who engage in it.