What is Dabba Trading and why it is illegal in India?

What is Dabba Trading?

Dabba trading is termed as an illegal form of trading in equities where you can trade in stocks outside of the stock exchanges. Dabba Trading works on the idea of a parallel stock market where traders without any Demat account and trading account can speculate on the share prices and stock indices.

 

 

How Dabba Trading Works?

In Dabba trading, the intermediary, which is also known as the Operator facilitates the trading process by allowing people to place buy and sell orders which the operator notes in his book and completes the transaction. All the trades fall outside the legal ambit as all the transactions take place outside the bourses.

 

 

Why is Dabba trading illegal in India?

Securities and Exchange Board of India has declared Dadda Trading illegal in India under Sections 3 & 4 of SEBI Prohibition of Fraudulent and Unfair trade practices. The Securities Contract (Regulation) Act, 1956 prohibits the trade in shares of companies between people outside the recognized exchanges.

 

Also, since the transactions take place the regulatory outreach, the profit earned from dabba trading is not taxable. SEBI and NSE have cautioned investors and traders about Dabba traders and advised them not to indulge in these kinds of acts as these activities are not regulated and the individual will be responsible for his/her actions.

 

Dabba Trading is an illegal form of trading in which exchange prices of commodities are used as benchmarks and unlike exchanges, participants may not be asked to put up a margin to trade and the contracts will be settled on a weekly basis. In dabba trading, the operator gets a small fee from both the buyer and seller.

 

 

Is Dabba trading profitable?

Since there are no governing rules and regulations for Dabba trading, it is risky but profitable. The dabba system settles all trades in cash. The system operators take orders personally and book transactions outside the stock market.  

 

Due to its illegality, there is no tax on profits. A trader also does not have to pay the Commodity Transaction Tax (CTT) and Securities Transaction Tax (STT) on any transactions they make. Several steps have been taken by SEBI to discourage dabba trading and to encourage investors to invest in mainstream markets.

 

 

Difference between legal trading and dabba trading

Legal trading and dabba trading are two different types of trading practices that are prevalent in India. The key differences between them are:

 

Legality: A registered stockbroker is required to conduct legal trading, which is regulated by the Securities and Exchange Board of India (SEBI). In contrast, dabba trading is unregulated and illegal and conducted outside of formal exchanges.

 

Transparency: Trades executed on recognized stock exchanges are transparent, recorded in official books, and executed through recognized stock exchanges. On the other hand, dabba trading is opaque, with trades executed through unofficial channels and not recorded in official records.

 

Risks: Investing in the legal market is also risky, but these risks can be managed and mitigated by investors. Since Dabba trading is not regulated or monitored, it is associated with high risks, including fraud.

 

Taxation: Taxes and other regulatory fees are associated with legal trading, which are paid through recognized channels. Investors may find dabba trading appealing because it is not subject to taxes and other regulatory fees.