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Dabba Trading
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. Dabba means box and
a dabba operator, in stock market
terminology is the one who indulges in dabba trading. His 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. A dabba operator acts as a
principal to all the trades and not as an agent of the client. He is a counter
party to the trades, whereas, he should be
the Clearing Corporation who guarantees trades on the BOLT/NEAT system. 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 he
evades the Income tax regulations, which prohibit dealings in cash, but also
service tax rules and many other mandatory requirements.
It may be learnt that
the Securities Contract Regulation Act permits securities transactions only
through stock exchanges unless the settlement of the trade is done on
a spot basis i.e. the receipt and delivery of
shares happen within 24 hours of the trade. But 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 cash trade is not
settled on rolling basis and the derivative trade may not have a month-end
settlement cycle.
In dabba trading, most
of the times, neither written contracts are made, nor the bills are issued .The
settlement cycles are authorized 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.
This presents before us
the picture of an outlaw practicing amidst us, the organized price discovery
mechanism of stock exchanges to run an illegal business, while maintaining the
façade of a stock market broker. It is a criminal 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 just like drunkards found in
the illegal toddy shop. 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. Most important, people should
not patronize such traders.
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. It must be understood that dabba traders are fair weather
friends. They seldom honour their commitments,
particularly when market is against them. Dabba shops close overnight, with
traders disappearing from the locality. 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. The Security blanket provided by the Security Market
Regulations is also not there.
India is a country
where the respect for law is scant. Our holy epic Ramayana prophesies compliance
of the law. Sita was kidnapped by Ravan because she did not follow the
instructions of Lord Rama and crossed the Line. Inspite of our rich cultural
past, we demonstrate noncompliance to our children, early in their lives. We
notice
parents as well as
teachers breaking traffic signals just outside the school campus, as there is no
penalty levied. Such small instances showing indiscipline grow leading
to casual approach
towards law.
Globally, Indian
Securities Markets have earned a “Place of Pride.’ Indian investors have gained
a lot from the rising indices. Let us be alert citizens and report all instances
of dabba in our locality.
Remember healthy market
is the foundation of wealth creation |
