What is ‘Dabba trading’ and why is it harmful?

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In the past week, the National Stock Exchange (NSE) issued a string of notices naming entities involved in ‘dabba trading’. It 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. It added that the entities are not recognised as authorised members by the exchange.

What is ‘dabba trading’?

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. In simple words, it is 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 the investor’s loss and vice-versa.

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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 unrecognised 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.

What is the problem?

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. All of it combined results in a loss to the government exchequer.

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