The National Stock Exchange (NSE) has recently issued a series of notices. These communications pinpoint entities involved in ‘dabba trading.’ This form of informal trading occurs outside the oversight of stock exchanges and is recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956.
Dabba Trading: A Closer Look
Dabba trading revolves around betting on stock price fluctuations without the necessity for an actual transaction to assume physical ownership of a particular stock as it happens in an exchange. As such, it results in gambling based on stock price movements. For instance, when an investor places a bet on a stock at a certain price point, say ₹1,000, and the price rises to ₹1,500, the investor gains ₹500. However, if the cost plummets to ₹900, the investor owes the difference to the dabba broker. Hence, it’s clear that the broker’s profit equals the investor’s loss and vice-versa during bull runs or bear markets.
The Legality Issue and Penalties
Dabba trading has been acknowledged as an illegal and unregulated activity. Conviction for engaging in this offence can lead to imprisonment for up to 10 years or a hefty fine up to ₹25 crore, or both.
Dabba Trading and Associated Problems
This form of trading is carried out via cash transactions, which allows traders to avoid taxation and remain outside the restrictions of the formal banking system, hence causing a loss to the government exchequer. Additionally, since there are no official provisions for investor protection, dispute resolution mechanisms, or grievance redressal procedures, investors’ security is compromised. The primary risk lies in the broker defaulting on paying the investor, or the entity becoming insolvent or bankrupt. Lastly, dabba trading can encourage the growth of ‘black money,’ fostering a parallel economy that could trigger risks such as money laundering and criminal activities.
Preventing Dabba Trading
To prevent dabba trading, laws like the Securities Contracts (Regulation) Act, 1956, should be more strictly enforced, and perpetrators should receive stringent punishments to deter others from indulging in such activities. Furthermore, retail investors must be educated about the dangers of this trading style. Financial regulators can organize awareness campaigns and circulate information regarding the risks associated with such trades. Lastly, monitoring social media and mobile apps, which often facilitate dabba trading, can help nab those promoting or engaging in it.
Understanding Market Terms
In financial investment terminology, a ‘bear’ is an investor who forecasts a decline in the price of a particular security; these investors are generally pessimistic about the market’s state. In contrast, a ‘bull’ is an investor who assumes that the market, a specific security, or an industry is primed to rise. ‘Bulls’ are optimistic investors who aim to profit from the upward movement of stocks. Given this understanding, it can be inferred that a bear tends to profit when stock prices decline, making option (a) the correct answer to the UPSC Civil Services Examination Previous Year Question.
