Let me share a local (Kashmiri) investor’s ordeal. He is an ardent investor in the stock market and has multiple stocks in his investment portfolio.
During his over a decade of experience in the stock market investment, he learned the art of calculating risks in the market and would always try his level best to hedge his investment against any unforeseen eventuality. His associates in the market fraternity would always bank upon him for a piece of investment advice.
But, today he is running from pillar to post to recover his stock market investment of over Rs.50 lakhs from a broker in Mumbai. He had executed some trading in gold commodities and after accumulating desired profits he asked the broker to pay the amount as he was exiting the market for some time.
Despite repeated requests, the broker didn’t pay the amount and ultimately the investor realized that he was cheated by the broker. Even as he has been pressing hard to get his money back, the chances of recovering the money are bleak. The worst part is that he is not in a position to file a formal complaint against the broker. Because, any such move is going to land him in more trouble on the legal front.
It’s pertinent to mention that the local investor had placed bet on the price movement of some commodities including gold without actually buying or selling the stock through a broker in Mumbai. Over a period of time, when his investment swelled to over Rs.50 lakhs, he sought payment of his amount. But the broker failed to pay him the amount, resulting in a dispute.
Now the question is why cannot he register a complaint against the broker with the police or the market regulator Securities Exchange Board of India (SEBI)?
Let me explain the reason. Actually, there are two stock markets running parallel to each other in the country. One is the legal market, the stock market regulated by the SEBI. Another is the parallel market with similar products functioning illegally as this does not come under the regulatory framework of the SEBI or any legal authority in the country.
In other words, the parallel stock market is an underground market operating clandestinely where trading/investing of shares and commodities available at BSE (Bombay Stock Exchange) & NSE (National Stock Exchange) is done without actually buying or selling these products.
The share trading that takes place outside the purview of stock exchanges is simply gambling centered on the stock price movements. There is no real transaction where an investor is given a physical ownership of a particular stock/commodity. This kind of stock trading is called ‘Dabba Trading’ and if reports are to be believed the volume of such trading is bigger than the stock market regulated by the SEBI.
Here all transactions are done in cash. Some industry veterans, quoted in a news report, say the average daily turnover in the ‘Dabba’ (cash) market is about Rs 0.7 lakh crore and the notional value of the average daily turnover in the equity derivatives segment is about Rs 130 lakh crore. Even adjusting for the derivatives number based on the value of premium paid on option contracts, it still works out to about Rs 1.3 lakh crore daily – definitely no small change for the exchanges or the government.
Even as ‘Dabba Trading’ is illegal, it continues to thrive under the nose of financial and market regulators.
What exactly is the modus operandi of ‘Dabba Trading’?
As described above, this kind of trading is informal trading that takes place outside the purview of the stock exchanges. Also known as ‘Box’ trading, the brokers here execute trades for their clients without placing them on stock exchanges. The brokers maintain their own trading books or 'Dabba' and settle trades with clients outside the exchange.
Traders bet on stock price movements without incurring a real transaction to take physical ownership of a particular stock.
For instance, an investor places a bet on a stock at a price point, say Rs.500. If the price rose to Rs.750, the investor would make a gain of Rs.250.
If the price falls to Rs.450, he/she would have to pay the difference to the Dabba broker.
In simpler terms, the broker’s profit is the investor’s loss and vice-versa.
Why are investors lured to ‘Dabba Trading’?
‘Dabba Trading has its own attractions which are enough to lure investors/traders. It requires no upfront margins, and does not draw the attention of tax authorities. In other words, it’s a route for them to escape taxation as there is no proper record of income or gain from the trading. These transactions are facilitated using cash and the mechanism is operated using unrecognised software terminals. There is no need to have a trading account, demat account, or having to give their KYC details.
Being out of the sight of tax lens, the transactions through ‘Dabba Trade’ don’t attract Commodity Transaction Tax (CTT) or the Securities Transaction Tax (STT).
Notably, CTT is a tax levied on certain commodity futures contracts traded on commodity exchanges in India. While as STT is a tax levied on certain securities transactions, including the sale and purchase of equities, derivatives, equity-oriented mutual funds, and exchange-traded funds (ETFs).
Besides, the ‘Dabba’ operators offer leverage as high as 500 times, meaning for every rupee that a client is willing to put, he/she will get exposure to Rs 500 worth of shares or derivatives.
What are the risks associated with this kind of trading?
‘Dabba Trading’, recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956, doesn’t entitle an investor/trader to any sort of protection and the main risk is that the broker may default in paying the investor or the entity becomes insolvent or bankrupt. In other words, being outside the regulatory purview implies that investors/traders are without formal provisions for investor protection, dispute resolution mechanisms and grievance redressal mechanisms that are available within a formal exchange.
Precisely, if the ‘Dabba’ operator goes back on his word and refuses to pay up, there is no recourse for the investor. One can’t complain of being duped when one is willingly part of an illegal activity.
What are the consequences to be faced by an investor/trader involved in ‘Dabba Trading’?
As already stated, Dabba trading is recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956.
In addition to being violative of the securities laws, dabba trading falls within the purview of Sections 406, 420 and 120-B of the Indian Penal Code, 1870.
Upon conviction, investors and traders can face imprisonment for a term extending up to 10 years or a fine up to Rs 25 crore or both.
Remarkably, in the last few weeks, the National Stock Exchange (NSE) issued a string of notices cautioning investors against investing in Dabba market as the same is prohibited by law.
The exchange has made it clear that trading on such trading platforms is illegal. It further states that participation in such illegal platforms is at the investor's own risk, cost, and consequences as such illegal trading platforms are neither approved nor endorsed by the exchange.
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.