Dabba Trading

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As per the Securities Contracts ( Regulation) Act, 1956 ( SCRA ), trading in the shares of companies between persons other than members of a recognized stock exchange is illegal. Members of stock exchange are required to get certificate of registration as “Stock Broker” from the market regulator, Securities and Exchange Board of India ( SEBI ) for buying or dealing in the securities. However, there are instance where certain un-registered persons carry out trades in securities outside the stock exchange mechanism which are illegal trades and are referred to as “Dabba Trading”.

Dabba trading is generally carried out by persons not registered with SEBI wherein one person or a group of persons carry out trading in securities by using price/quotes of securities available from the stock exchange trading platform/internet/television screen etc. The details of such dealings are noted down in a separately maintained book which may be either in physical or electronic form. In order to avoid audit trail, settlement of transaction is largely done by receiving / paying the difference on account of price movements of securities and without receipt /delivery of securities. Payment /receipt of funds in dabba trades is done using cash i.e. without using the banking system.   

Consequences of Dabba Trading:

In dabba trading, investors are subjected to credit risk as there is a possibility of persons who has carried out dabba trading default in making payment to the investors or that person becoming an insolvent/bankrupt. In such situations, the investors would not have access to the official complaints redressal / arbitration mechanism as is available to investors who have dealt through a SEBI registered stock broker of a recognized stock exchange.

Some of the consequences of dabba trading are as under:

a. The activity is carried out in cash and hence encouraged growth of the “Black Money”.

b. Perpetuation of parallel economy; risk of money laundering and criminal activities;

c. Evasion of taxes hence loss to the exchequer of Government;

d. There is no guarantee for settlement of transaction;

e. Circumvention of regulatory requirements as follows:

 i. Know Your Client ( KYC ) norms / requirements viz., client due diligence, PAN Card and Anti Money Laundering ( AML ) requirements;

ii. Risk management and various other prudential requirements for taking membership of stock exchange, viz., capital requirement, payment of margin etc.,

iii. Payment using banking channels;

Punishment envisaged under securities laws for dabba trading:

In terms of section 23(1) of SCRA, any entity / person who contravenes sections 13, 16, 17 or 19 of the SCRA shall be prosecuted and on conviction, he shall be punishable with imprisonment for a term which may extend to ten years or with fine up to rupees twenty five crores or with both.

As per section 25 of SCRA, offences punishable under section 23 are cognizable offences within the meaning of Code of Criminal Procedures, 1973 and as such can be investigated by state law enforcement authorities also. Further, Section 26 of SCRA permits lodging of complaints of violation of the Act by the state authorities.

In terms of Section 26 of SCRA, no court inferior to that of a court of Sessions shall try any offences under the Act.

Legal Provisions in Securities Laws against dabba trading:

An entity who indulges in dabba trading violates the following provisions of Securities Contracts ( Regulation ) Act, 1956 ( SCRA):

i. Section 13 of SCRA – Contracts in securities otherwise than between members of a recognized stock exchange in a notified area are prohibited by this section. Application of Section 13 to a particular state or area is done by Central Government through notification in the Official Gazette.

ii. Section 16 – As notified under SCRA, all contracts in securities except spot delivery contracts and contracts permissible under SCRA and the rules, bye-laws and regulations of a recognized stock exchange, are illegal.

iii. Section 17 of SCRA – This section prohibits the business of dealing in securities except with a license granted by SEBI.

iv. Section 18A of SCRA – This Section provides that contracts in derivatives shall be legal and valid only if such contract are traded on a recognized stock exchange and settled on the clearing house of the recognized stock exchange in accordance with the rules and bye laws of such stock exchange.

v. Section 19 of SCRA – This section specifically prohibits organizing or assistance in organizing or being a member of any stock exchange ( Other than a recognized stock exchange ) for the purpose of assisting in, entering into or performing any contract.

Reference:

The Hindu

To Know more about Dabba Trading, Click Below Link:

Guidance Note on Illegal Trading in Securities ( Dabba Trading )

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