Dabba trading menace returns
Why you should not do it?
The menace of dabba trading returns, and why you should not do it?
The first step to sensible investing is to know there is no certainty in markets. Both in terms of returns and risk.
There is no such concept as guaranteed returns or zero risk.
Even government securities are termed risk-free, which is different from zero risk.
The National Stock Exchange of India recently cautioned investors about the prevalence of 'dabba' trading in the domestic share market and asked investors not to indulge in such trades. The exchange warned investors about this practice, where profits were also assured.
What is dabba trading?
Dabba trading refers to an illicit and unofficial stock trading practice in India.
Dabba trading is a proxy stock market where the operator trades the stock outside the market illegally based on the prices quoted on the BSE and NSE, but the settlement is executed in cash.
This type of trading occurs outside the regulatory framework, making it an unapproved and unregulated activity.
Cheating on taxes
Dabba trading allows participants to not maintain proper income or gain records, which helps them evade taxation.
They are not required to pay Securities Transaction Tax on their transactions. The use of cash also keeps them out of the formal banking system's radar, causing a revenue loss for the government.
No recourse in case of default
A major risk in dabba trading is the possibility of the broker defaulting on payments to the investor or the entity going bankrupt.
The NSE has said that as dabba trading operates outside the regulatory purview, investors will not have recourse to the investor protection measures, dispute resolution mechanisms, and grievance redressal systems available within a regulated exchange.
The cash-based nature of dabba trading, and the absence of auditable records, can contribute to the generation of 'black money' and creates a parallel economy.
This leads to money laundering and criminal activities, posing a significant challenge to investors and the overall financial system.
Consequences of dabba trading
Dabba trading is considered an offense under various laws and regulations.
Here are some of the legal consequences that individuals involved in dabba trading may face:
- Securities Contracts (Regulation) Act (SCRA), 1956: Dabba trading is a violation of Section 23(1) of the SCRA, which deals with illegal contracts in securities.
- Indian Penal Code, 1870: Dabba trading also falls under the purview of Sections 406 (criminal breach of trust), 420 (cheating and dishonestly inducing the delivery of property), and 120-B (criminal conspiracy) of the Indian Penal Code.
- Penalties: Upon conviction, investors and traders involved in dabba trading can face severe penalties. These may include imprisonment for a term extending up to 10 years, a fine of up to Rs 25 crore or both.
Here is the link to the NSE warning https://static.nseindia.com/s3fs-public/2023-04/PR_cc_18042023.pdf
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