Dabba Trading: An Unregulated and Illegal Practice | 14 Apr 2023

For Prelims: National Stock Exchange (NSE), Securities Contracts (Regulation) Act (SCRA) 1956.

For Mains: Issues Related to the Banking Sector in India.

Why in News?

Recently, National Stock Exchange (NSE) issued a string of notices naming entities involved in “dabba trading”.

What is Dabba Trading?

  • About:
    • Dabba trading is a form of informal trading that takes place outside the purview of the stock exchanges.
    • In this practice, 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.
    • This results in gambling centred around stock price movements, which is illegal and unregulated.
      • 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 the investor’s loss and vice-versa. The equations are particularly consequential during bull runs or bear market.
  • Legality:
  • Issues Associated:
    • Cash Transactions: Transactions are facilitated using cash and the mechanism is operated using unrecognised software terminals, which helps dabba traders escape taxation.
      • The use of cash means that they are outside the purview of the formal banking system. It results in a loss to the government exchequer.
    • Lack of Security to Investors: 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.
      • The primary risk entails the possibility that the broker defaults in paying the investor or the entity becomes insolvent or bankrupt.
    • Black Money: It could potentially encourage the growth of ‘black money’ alongside perpetuating a parallel economy, which could lead to risks entailing money laundering and criminal activities.

How can Dabba Trading be Prevented?

  • Strict Enforcement of Laws: The Securities Contracts (Regulation) Act, 1956, already prohibits 'dabba trading' and provides for severe penalties upon conviction. However, these laws need to be more strictly enforced, and culprits should be punished to deter others from engaging in such activities.
  • Increasing Awareness: Retail investors need to be educated and made aware of the dangers of 'dabba trading'. Financial regulators can conduct awareness campaigns and disseminate information about the risks associated with such trades.
  • Monitoring Social Media and Mobile Apps: 'Dabba trading' is often facilitated through mobile apps and social media. Regulators can monitor these platforms and take action against those who promote or engage in it.

UPSC Civil Services Examination Previous Year Question (PYQ)

Q. In the parlance of financial investments, the term ‘bear’ denotes (2010)

(a) An investor who feels that the price of a particular security is going to fall

(b) An investor who expects the price of particular shares to rise

(c) A shareholder or a bondholder who has an interest in a company, financial or otherwise

(d) Any lender whether by making a loan or buying a bond

Ans: (a)

  • A ‘bear’ is an investor who believes that a particular security or market is headed downward and attempts to profit from a decline in stock prices. ‘Bears’ are typically pessimistic about the state of a given market.
  • Whereas, a ‘bull’ is an investor who thinks the market, a specific security or an industry is poised to rise. Investors who adopt a ‘bull’ approach purchase securities under the assumption that they can sell them later at a higher price. ‘Bulls’ are optimistic investors who are attempting to profit from the upward movement of stocks.
  • Therefore, option (a) is the correct answer.

Source: TH