Introduction
The Stock Market in India presents various opportunities for earning high-yielding returns. The Securities Exchange Board of India (SEBI) regulates the entire trading process under the governance of the Ministry of Finance. When certain trading activities operate in the shadows of such legality and regulation, they are deemed illegal and hold no redeemable value. One such practice is Dabba Trading. Read on to learn more about Dabba Trading in India and why it is illegal.
What is Dabba Trading?
Dabba Trading, also known as box or bucket trading, has been one of the prevalent illegal trade practices in India over the years. In dabba trading, the trades are executed off the books. Instead of recording buy/sell orders on recognised exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE), traders deal in internal systems through trading facilitators. Therefore, there is no real trade, but more of a gambling activity focused on stock price movements.
How Does Dabba Trading Work?
In Dabba Trading, traders place orders based on the prices listed on the official exchanges. However, these trade orders are not placed at the exchange. They merely get recorded in the broker's books. As the transactions are unregulated, there is no tracking or assurance of such trades. The broker may use a makeshift or a private residence to conduct such operations.
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For example, you place an order to buy a share of ABC company at Rs. 2,000. If the stock price escalates to Rs. 2,500, you would ideally make a profit of Rs. 500, which the dabba broker pays you. However, when the price falls, you pay the difference to the dabba broker. The catch is you never legally bought or sold the stock on the exchange. You are relying on settling the differences off the radar directly.
Why is Dabba Trading illegal in India?
Dabba Trading is considered a stock market fraud in India for the following reasons:
· Lack of regulatory oversight
Dabba Trading happens outside the legal purview of SEBI. This means there is no regulation of trades. No oversight results in no legal authority stepping in in case of fraud and manipulation. The brokers involved can easily manipulate the rules and dishonour transactions. They also leave no money trail, which makes it harder to keep track of settlements.
· No investor protection
SEBI acts as a protective shield for traders in the Stock Market. SEBI ensures there is no fraud by vetting the stockbrokers. If you have any concerns or disputes, it works towards resolving them. With dabba trading, investors lose such legal protection. If the broker decides to abscond with the money, there is no legal recourse available to recover the loss.
· Tax evasion
When you invest through the stock exchanges, you are required to pay taxes on your investments. They include Commodity Transaction Tax (CTT), Securities Transaction Tax (STT), and more. But with dabba trading, it becomes easy to evade such taxes. The transactions are off the books and facilitate such evasion. However, this impacts the country's economy and is against the law.
· Market manipulation
Since Dabba Trading is not conducted on official exchanges, it allows the Dabba brokers to manipulate the market. They may artificially deflate or inflate the stock prices, leading to losses for the investors engaging in such trade. Such a practice undermines the market integrity and is not in the best interest of the parties involved.
· Promotion of criminal activities
Dabba Trading is often linked to money laundering. It facilitates the route to funnel illicit money as the transactions are conducted through cash. Additionally, as there is no regulation, people can go to any lengths to extort money. Involvement of goons and other forms of coercion is common in such cases. Thus, leading to risks and criminal activities beyond financial fraud.
Consequences of Dabba Trading
Participating in Dabba Trading has severe legal and financial consequences. Investors caught in such activities can face hefty fines, legal action, and imprisonment in certain cases. Not to mention the losses they face due to a lack of legal protection while trading.
Legal action is taken against the party at fault under the Securities Contracts Act 1956 for Dabba Trading. Dabba Trading also includes repercussions under Sections 406, 420, and 120-B under the Indian Penal Code, 1870.
When convicted, traders and brokers engaging in Dabba Trading face imprisonment of up to ten years or a fine of up to Rs. 25 crores, or both.
Conclusion
On the surface, Dabba Trading seems like a quick way to make profits without the regulatory pressure for investors and brokers involved. However, the legal consequences make it a dangerous endeavour. It is critical to learn about this fraudulent activity to avoid being a victim or unknowingly engaging in it. SEBI runs campaigns to spread awareness on the same.
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