Explained: What Is The Illegal 'Dabba Trading' Against Which NSE Has Warned Investors?

On a day when India's stock market witnessed IT giant Infosys¡¯ shares bleed heavily and on the other hand, India¡¯s favourite meme stock ITC¡¯s shares hit an all-time high, the National Stock Exchange (NSE) cautioned investors against 'dabba' trading in the stock market. It especially warned against two persons offering the illegal form of trading in shares.

The warning came yesterday after NSE found that Nitin Shantilal Nagda and Narendra V Sumaria were providing 'dabba' trading. These persons were registered with a trading member (TM) as an authorised person (AP) and the said association as an AP was subsequently cancelled by the TM.

Cautioning investors, NSE asked them not to subscribe to any such scheme or product offered by any person providing illegal 'dabba' trading activity in the stock market as the same is prohibited by law.

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What Is ¡®Dabba¡¯ Trading?

Dabba trading is a form of informal trading which takes place outside the purview of the stock exchanges like BSE and NSE, and hence is illegal in India.

Traders in Dabba trading bet on stock price movements without a real transaction. As per a Mint report, this results in no physical ownership of a particular stock in comparison to when it is done on an exchange. Also, for being violative of the securities laws, dabba trading also falls within the purview of Section 406, 420 and Section 120-B of the Indian Penal Code, 1870.

Simply put, Dabba is a parallel stock market in which traders can bet on the direction of share prices/stock indices without a trading account, demat account, or providing their KYC (know your customer) details. The operator does the same work as a sports bookie, accepting buy and sell bets from clients and then paying out/collecting the difference in cash, depending on which way prices have moved, as per Moneycontrol.

There is no delivery of physical goods or securities. Dabba trading requires no upfront margins and does not draw the attention of the tax authorities since it's illegal and already banned by SEBI.

How 'Dabba Trading' Differs From Legal Trading

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Usually, when an investor places an order to buy stocks, the broker executes the order on the stock market. The transaction incurs some expenses, like brokerage fees, exchange fees, SEBI turnover fees, and taxes paid to the Income Tax Department and Securities Transaction Tax (STT).

However, in the case of dabba trading, as per Indian stockbroker firm AngelOne's report, the agent will execute the trade outside the market, and no actual order is placed on the exchange. The buyers bet on the scrip at a price point. If the share price rises, the trader would gain the difference between the quoted price and the difference. Similarly, when the price falls, the customer will have to pay the difference. So, actually, traders don¡¯t need to have the money to transact in the dabba system.

NSE¡¯s Warning To Investors

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"Investors are cautioned and advised not to trade on such illegal trading platforms. 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," NSE said, as per AP.

For any kind of disputes relating to such prohibited schemes, mechanisms such as benefits of investor protection under the exchange's jurisdiction, exchange dispute resolution mechanism and investor grievance redressal mechanism administered by the exchange, would not be available to investors, it added.

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