Many individuals are not aware of basic trading rules and regulations. So, they contact the brokers to execute the trades on their behalf. Some unregistered or unethical brokers may lure individuals into illegal activities such as dabba trading. You may be fascinated at first by seeing the pros like no tax, lower cost, etc. But the reality is that dabba trading is an illegal way of trading and can even lead to imprisonment.
This article will help you understand the meaning of dabba trading, the pros and cons associated with it, and whether you should opt for it or not.
What is Dabba Trading?
Dabba trading is transactions that take place outside of the official stock exchanges, such as the NSE or BSE, through brokers. On the surface, it might appear to be normal trading, but in reality, it takes place off the books, evading taxes, investor protection, and is illegal in nature.
To put it simply, Dabba trading is similar to betting on stock prices on a reputable platform without actually purchasing or disposing of the stocks. The broker and trader typically settle their transactions in cash, and the trade is not recorded on the official system.
Key Features:
- Unregulated: Neither SEBI nor the official stock exchanges has any control over these transactions.
- No Taxation: Capital gains, GST, and STT taxes are typically evaded.
- No Official Trade Execution: Neither the NSE nor the BSE records trades.
- Cash Settlements: Parties directly exchange cash for gains and losses.
- Managed by Unregistered Brokers: Managed by people who aren’t officially registered.
- Anonymous trading: It is frequently carried out without official identification, PAN, or KYC.
How Does Dabba Trading Work?
Let us look at how dabba trading actually works:
- No formal broker involved: The trader gets in touch with a dabba broker, who isn’t listed on any stock exchange or with SEBI.
- Trades are recorded off the books: No actual trading takes place on the exchange; instead, the broker records orders in a spreadsheet or private ledger rather than routing them through a formal platform.
- Prices are tracked from the actual market: The broker only refers to the official exchange’s real-time stock prices when calculating profit or loss.
- Cash-based settlement: The profit or loss is determined by market movements at the end of the day or trading period and paid out in cash, without the use of banks or digital trails.
- No share delivery or ownership: The trader merely wagers on whether the price will rise or fall; they never truly own or sell the shares.
- Unauthorised software: Some dabba brokers use platforms that visually resemble official trading systems but operate independently and are not linked to any recognized stock exchange.
- Lack of documentation or compliance: Trades are carried out without a PAN, KYC, or other official records, rendering them unlawful and untraceable.
Should You Opt for It?
Let us look at the pros and cons before you decide whether you want to opt for it or not:
Pros:
- Reduced Costs: It may appear less expensive if there are no brokerage, exchange fees, or taxes.
- No Margin Requirements: Traders don’t need to worry about upfront capital when they take positions.
- Instant Settlement: Profits and losses are realised right away because all transactions are completed in cash.
- Easy to access and informal: Particularly well-liked in Tier 2 and Tier 3 cities, where unofficial networks are active.
Cons:
- Penalties and Illegality: It is a crime punishable by severe fines and jail time under the Securities Contracts (Regulation) Act of 1956.
- No Investor Protection: You have no recourse if the broker defrauds you or refuses to pay.
- Fraud Risk: Brokers have the ability to manipulate prices or just vanish with your money because it’s all off the books
- Zero Transparency: No accurate records, no paperwork, and no responsibility.
- Problems with tax evasion: If caught, income tax authorities may impose penalties.
- Destabilises Financial Markets: It undermines the legitimacy of established market systems and encourages the use of black money.
Bottomline
The conclusion can be drawn that dabba trading is an illegal way of trading. There is no official record of any such trade happening on the exchange. The broker is responsible for handling your money, executing the trade off the books, and then distributing your share of profit or loss. In case of any fraud, the investors cannot take any major action as it does not come under the SEBI regulation.
Also, if you are found involved in such trade practices, fines and penalties, along with imprisonment, are the punishment.