Dabba trading, also known as box trading, is an illegal form of trading in the stock market that involves unofficial, off-the-books transactions. In this practice, traders (called “dabba traders”) buy and sell stocks without officially recording them on stock exchanges. The purpose of this is often to avoid paying taxes or brokerage fees, and it may also be used to manipulate stock prices or facilitate insider trading.
Market experts said that in terms of volumes, dabba trading is likely to have reached a whopping Rs 100 lakh crore per day.
In this blog, we’ll explore what dabba trading is, how it works, why it’s illegal, and the consequences for those involved in it.
What is dabba trading –
Dabba trading refers to the process of trading stocks, commodities, or other financial instruments outside the official stock exchanges, without any formal documentation or regulation. The term “dabba” translates roughly to “box” in Hindi, symbolizing a hidden or off-the-record manner of trading. Traders engage in dabba trading through informal brokers, who facilitate trades and settle profits or losses in cash, rather than through official exchanges.Dabba trading refers to an illegal form of stock market trading where orders are placed off-exchange, outside of the formal stock exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). In a typical Dabba trade, a trader (often referred to as a “dabba trader”) deals with a broker who acts as an intermediary. These transactions do not get recorded in official exchange systems, and the settlements are done in cash.
The term “dabba” in Hindi translates to “box,” implying that the transactions are happening in a “box” or off-the-record environment, away from the watchful eyes of the exchanges and regulatory authorities.
How Does Dabba Trading Work?
In Dabba trading, a trader contacts a broker and places an order to buy or sell a particular stock. However, the order is not executed on the official exchange. Instead, the broker enters the order in their internal system and the trade is essentially a “paper trade.” When the stock price moves in the trader’s favor, the broker settles the profit or loss in cash, based on the difference between the agreed-upon entry price and the exit price.
For example, if a trader places an order to buy a stock at ₹1000 and the stock rises to ₹1100, the broker will pay the trader ₹100 for each share (minus any fees or commissions).
For example, suppose Trader A wants to purchase 50 shares of XYZ Ltd at ₹200 in the dabba market. They place the order with a broker, who then finds a seller willing to sell 50 shares of XYZ Ltd at ₹200. Once the deal is done, the broker takes a commission based on the trade’s value.
Why is it illegal?
Dabba trading is illegal because it violates regulations governing financial markets. In India, SEBI strictly monitors the market, and engaging in such practices can lead to severe penalties, including fines and jail.
This practice can distort market prices and undermine the integrity of the financial system.
It puts investors at risk because there are no legal safeguards for transactions done outside the official.
Why Do Traders Opt for Dabba Trading?
➢Avoidance of Taxes and Regulations
➢Anonymity
➢Quick Profit
➢Avoiding Market Limitations
Consequences:
While Dabba trading might appear attractive to those looking to avoid formal regulations, it comes with significant risks:
Legal Consequences: Dabba trading is illegal in India. Engaging in such practices can lead to penalties, fines, and even imprisonment under the Securities and Exchange Board of India (SEBI) Act. SEBI has cracked down on such activities in the past and continues to monitor the situation closely.
Lack of Investor Protection: Unlike exchange-based trading, where transactions are monitored and regulated, there is no protection for investors in Dabba trading. If a broker defaults or scams a trader, the trader has no legal recourse to recover their funds.
High Risk of Losses: Since Dabba trades are speculative and often involve high leverage, traders are exposed to the risk of significant losses. A single adverse price movement can lead to a massive loss for traders involved in such unregulated practices.
Market Manipulation: Dabba trading creates an environment ripe for market manipulation. Since trades are not recorded, it is difficult to track or monitor any unusual trading activities, allowing for potential manipulation of stock prices by unscrupulous players.
Punishment:
Engaging in Dabba trading can lead to severe legal repercussions. Traders caught participating in such activities may face –
Imprisonment for up to 10 years
Heavy financial penalties
Legal actions from SEBI or other authorities
Dabba trading may seem like an easy way to make quick profits without having to deal with formalities, but it is a highly risky and illegal practice. The lack of legal protection, the potential for massive losses, and the legal consequences make it a practice that traders should avoid at all costs. Instead, individuals should opt for regulated exchanges and trading platforms, where transparency, legal safeguards, and market integrity are assured.Dabba trade offers no benefits of safe and guaranteed trades done on Stock Exchanges. Therefore, investor should exercise caution and should not indulge any kind of dabba trading.