Trading in the stock market has become increasingly popular today. The stock market platforms and the knowledge of trading are accessible to everyone today, making stock market trading one of the most exciting sources of building wealth.
The growing popularity of the stock market has benefited the economy and the public at large, but it has also made room for some illegal activities.
Dabba trading is one of them.
What is dabba trading?
The process of trading illegally outside the boundaries of stock exchanges is called dabba trading or box/bucket trading.
Boxes are called “dabbas” in Hindi, and that is where the term dabba trading originated.
The brokers here are called the dabbawalas. Investors and traders transact with these brokers instead of using the stock exchange platform.
How does dabba trading work in India?
What are the options to buy movie tickets when all of them in the box office are sold out?
While some postpone the plan for another day, some others try buying tickets in black.
The concept of dabba trading is comparable to buying movie tickets in black.
The dabba trading brokers act as middlemen between traders. They look for traders interested in buying a particular security. They also look for a seller looking to sell the same security in the dabba market.
The brokers establish a connection between these two parties and facilitate the trade in exchange for a commission, calculated as a percentage of the trade value.
Example: Trader A wants to buy 100 shares of ABC Ltd at ₹100. He wants to buy them in the dabba market and places the order with a dabbawala. The broker then looks for a seller willing to sell 100 units of ABC Ltd at ₹100.
Upon completion of the transaction, the broker charges a commission on the trade value.
Another form of dealing in the dabba market is through betting.
Traders speculate price movements of securities and bet with the brokers. If the prices move according to their speculations, the traders profit, else the brokers profit.
The transactions in dabba trading are mostly cash-based.
Example: ABC Ltd is trading at ₹150 in the stock market. Trader A speculates a decrease in price to ₹140 and gambles with the broker. If the price falls to ₹140 on the expected date, trader A wins the bet and makes a profit. If not, trader A incurs losses and must pay the broker.
Why do some traders choose the dabba market over regular stock exchanges?
The dabba market offers some attractive benefits that entice traders to transact here:
- No stock market regulations: As these transactions materialise outside the stock market’s purview, the rules of the stock exchanges do not apply here.
- Tax saving: While the money earned through stock markets is taxable, the money in the dabba market is unaccounted for and tax-free. This is one of the prime reasons for traders to choose this over traditional trading.
- Trading costs are saved: Trading on the stock exchange includes payment of various fees like stamp duty, brokerages, depository charges, etc. Traders who choose dabba trading save money on all these costs.
- Quick execution: Since this is an unregulated market and the number of people trading here isn’t very high, the execution of transactions happens faster than the stock market.
- Better prices of securities: The prices of securities in the dabba market are generally different from the stock exchange prices. The prices in the dabba market are manipulated to favour the traders.
Is dabba trading legal in India?
No, dabba trading is illegal and is a punishable offence in the Indian court of law.
The Indian Penal Code (IPC) of 1870 covers the dabba trading in Sections 120-B, 406 and 420.
According to the Securities Contracts Regulation Act (SCRA) of 1956, dabba trading is a criminal offence under Section 23(1). The punishment includes imprisonment for up to 10 years or a fine of up to ₹25 crores or both.
Apart from the legal consequences when caught, the dabba market involves other risks like the below:
- Difficulty in resolving disputes: It is hard to find resolutions in case of disputes, between the traders or with the broker. As there are no regulations or governing bodies, there are no set rules about how these transactions must be executed, leading to frequent disputes between the parties involved.
- No transparency: Since dabba trading does not involve any statutory requirement of disclosing the financial details, there is no transparency between the traders and brokers.
Lack of transparency can prompt parties to defraud each other.
- No legal protection – Transactions happening on the stock exchange are governed by statutory bodies, and it offers various kinds of protections to its investors to cover risks and losses. However, dabba trading does not involve any protection for losses that the traders may incur.
According to the Income Tax Act of 1961, income, including profits from investments are taxable.
Income tax, paid by the citizens of the country, is one of the primary sources of income for the government to conduct its day-to-day activities.
Since dabba trading is not within the scope, the traders evade tax payments.
Tax evasion is an unlawful practice that affects the income of the government.
Traders may also follow other unlawful practices to launder money earned through dabba trading.
Money laundering creates various economic issues like security threads, financial instability, etc.
The laws and regulations around stopping the dabba trading in India are getting stricter by the day.
A group of 6 people were recently caught by the police for trading in the dabba market.
This group has earned a turnover of ₹4,672 crores by trading in the illegal market, leading to a revenue loss of ₹1.95 crores to the government.
With laws becoming more stringent, it is exceedingly important for traders to reevaluate their reasons for entering the dabba market.
Now that we know the meaning of dabba trading, it is clear that this seems lucrative and offers opportunities for saving costs, but the risks involved are high.
The stock market offers various investment opportunities with different risk to reward ratios. So, traders must explore all avenues possible within the stock market rather than taking illegal routes for a higher return.
StockGro is India’s first and largest ‘Social Investment’ platform aimed at helping you master the art of “Trading & Investment”. Trade, Invest and get rewarded to Learn everything about ‘Investments’ the fun-filled way.