DABBA TRADING - NIGHTMARE FOR INVESTORS

We often read about dabba trading, not being permitted by the regulators. Many do not know the mechanics, and also the risk associated with it, till now. A dabba traders office is like any other broker’s office having terminals linked to the stock exchange showing market rates of stocks. However, the difference is that the investor’s trades do not get executed on the stock exchange system but in the dabba operator’s books only. This kind of operation, where trade is kept within the books of the operator is called “dabba” in the popular market terms. A Dabba operator flouts rules and regulations relating to Client Protection, which includes registrations, margins, transaction, execution and settlements. Not only has he evaded the Income tax regulations, which prohibit dealings in cash, but also service tax rules and many other mandatory requirements. If we deeply research into this subject we can understand that a dabba trader do not have the periodical derivative FNO settlement dates being followed. A dabba operator allows the client to carry forward the trade, be it in cash or in derivative segment for a period, not necessarily prescribed by the stock exchange..The settlement cycles are decided by the dabba operator, himself. There is no daily mark to market settlement if the trade is in client’s favour, whereas losses are extracted regularly from the clients.

To describe Dabba trading in lay man words , “You put money to get 100 shares, but the software will register only 10 shares officially in the market, and you will see 100 in your screen, which makes you believe that you really purchased 100 stocks, which is inaccurate”. It is not the investor who makes money, the broker who involves in trading on behalf of an investor makes the money, with 10% of cash put in their pockets illegally and unknown to the investor. Also these brokers don’t deal with successful investors, mostly targets the average and pity ones.

I believe it to be an offence, not much different from smuggling or black marketing. As a result, frequent raids are conducted on dabba trading operators in which their computers and records are seized. Those working in his office are also taken in the custody once they find such activities taking shape. If we run through the media, we can learn that the Gujarat police has conducted several raids in the past and alerted citizens. Media has also played its role in reducing the menace of dabba trading. Some dabba traders hedge their positions in the

market by partly executing the trade in the market, maybe in their own proprietary accounts or some benami names. Dabba traders disappear when the market goes against them, resulting in huge losses for their clients. The brokers who permit such activity in their branches or even sub-broker’s offices are the affected parties. Stock exchanges take

complaints against dabba trading very seriously and enforce strict penalties. Even suspension is levied, if stock exchange inspections confirm the complaint As Sensex jumps, resulting in the spurt in trading activity, dabba traders bounce back in the business. Hence constant vigilance is required.

IBN Live in one of their article revealed that Dabba trading, is still a thriving business in Mumbai, Ahmedabad, Rajkot, Jaipur and Ludhiana long after the SEBI had banned it. They claim that the dark side of this unauthorised stock trade is that it has undergone a technological makeover and paper notebooks have given way to hi-tech software. Available for Rs 2,000 to 8,000 in Mehsana, Gujarat, this software deletes one zero from the number of shares entered for trade. So, if a broker keys in hundred shares, only 10 will get fed into the official exchange terminal. However, the Dabba traders' screen will still show 100 shares. Many a times, it’s hard to understand the state of mind of the investors because some investors, for their profit, trade with these dabba traders knowing their illegal activities only because they facilitate trade with only 10 per cent margin instead of the 25 per cent as in a legal trabsaction in the Future and Option Segment (FNO). That means to buy shares worth Rs 1,000, an investor needs to deposit only Rs 100. However, it's not the investors who make money in this trade, but the brokers, who are quite often not even registered with a stock exchange.

 The clients patronizing such dabba traders may find some short-term benefits here. They do not follow ‘Know Your Client’ norms; fill cumbersome forms, sign long agreements and requirements like PAN card. Margins are bypassed and leveraging is freely available. Unaccounted cash is used for making payments rather than making payment by cheque. There are histories written in blood when Dabba shops close overnight, with traders disappearing from the locality once they see a killing in the market. They go to the extent of employing goons for the recovery of losses. In such a case, neither Stock Exchange Arbitration is available to the investor nor there is any access to customer protection funds which is of up to Rs. 100000.

Nobody has a clue about the dabba market size but it’s functioning on a large scale and it is certainly something which might beat any estimation made during research. However the figures of the Dabba Market turnover for the year 2005 was 5.72 lakh crores which then multiplied near to 24 times to 119.48 lakh crores in the year 2011 and after SEBI’s stringent action and trading policies saw this market shrinking 53.11 lakh crores till July 2012.