NSE cracks down on ‘Dabba Trading’! Find out what investors need to know.
As the Indian stock market continues to gain momentum and attract a growing number of investors, people always seek to exploit its potential for their own gain. While the stock market can be a great tool for growing your investments, some investors have turned to a shadowy practice known as ‘Dabba Trading’ to get an edge.
This practice involves buying and selling stocks outside the official stock exchanges, which has increased in India. It has caught the attention of regulators. But what exactly is Dabba Trading, and why are we discussing it today?
The battle against ‘dabba trading’ is heating up as the National Stock Exchange (NSE) recently issued warnings to several entities involved in this illegal practice. The exchange has urged retail investors to avoid any schemes or products such entities offer that promise guaranteed returns in the stock market, as these are legally void.
NSE has also pointed out that the exchange does not recognise the entities in question.
If you are wondering which organisations are involved in dabba trading, a recent Moneycontrol report reveals that Shree Parasnath Commodity Pvt Ltd, Shree Parasnath Bullion Pvt Ltd, Ferry Tail Trading Pvt Ltd, and Bharat Kumar were among those offering dabba trading platforms with guaranteed returns to investors.
However, NSE has clarified that this is illegal and could result in significant losses for investors.
What is Dabba Trading, and How is it Executed?
Well, Dabba trading is a sneaky way of trading stocks that happens outside the official stock exchange platform. In this type of trading, operators try to lure investors into trading in the stock market without having a Demat account or completing KYC procedures.
A network of brokers operates this business from their homes or small offices. These brokers create their own client base and trade on their behalf, often completing transactions in cash on a weekly basis. It’s a shady business that operates under the radar without legal recognition or oversight from stock exchanges.
Dabba Trading vs Legal Trading
In legal trading, when an investor places an order to buy a stock, the broker executes the order on the stock exchange platform. The investor pays various charges like brokerage charges, exchange charges, SEBI turnover charges, and securities transaction tax (STT) for every transaction made.
On the other hand, in dabba trading, no orders are placed on the official stock exchange platform. In this type of trading, bets are placed on the price movement of stocks. So, there are no transaction fees to be paid in dabba trading. If the price movement is in your favour, you make a profit, but if the trend is against you, you will have to pay the difference. This type of trading is illegal and operates outside the purview of the NSE.
Why is Dabba Trading Illegal?
Dabba trading involves unofficial transactions that take place outside the purview of SEBI. This type of trading also involves high risks like insider trading and stock price rigging, which can lead to heavy losses for investors.
One of the major drawbacks of dabba trading is that if an investor suffers a loss, it’s very difficult for them to seek any legal remedy or complaint anywhere since the transaction was illegal.
Moreover, dabba trading is not recognised by the stock exchanges and is a punishable offence. The concerned person or company can be fined and imprisoned if found guilty.
What’s in it for Investors?
The National Stock Exchange (NSE) has warned investors about fraudsters trying to lure them with the promise of higher returns. The exchange has advised investors to exercise caution and not fall for such traps. Investors who invest in such schemes will be solely responsible for the risks and consequences involved.