NSE warns against 'dabba trading' promoted on social media platform

The National Stock Exchange (NSE) has recently passed a circular warning investors regarding the risks associated with 'dabba trading,' an illegal and unregulated form of trading and investing. This advisory comes in the wake of the identification of several Facebook pages promoting such activities.

But, what is 'dabba trading'?

Dabba trading refers to an illegal form of trading where trades are executed outside the official purview of SEBI-recognized Stock Exchanges. Such trading is through illegal channels, making it not only unauthorised but also highly risky for participants.

Simply explained, dabba trading is similar to gambling centred around stock price movements. Imagine a group of friends who gamble on cricket scores. Every friend writes down their guesses and bet money on who will be closest to the actual score.

Dabba trading is similar but with stocks instead of cricket scores. Traders make bets on Stock prices, but these bets are not done through the official stock market. Instead, they're done through an illegal, parallel system run by someone called a "dabba operator". People bet on whether a stock's price will go up or down, but no actual stocks are bought or sold. The dabba operator keeps track of these bets and the money involved. At the end of the day, if a person's guess about a stock's movement is right, they win money from the operator; if they're wrong, they lose money.

How to identify dabba trading scams?

• Watch out for unregistered individuals: These schemes are typically run by entities not registered with any regulatory authority
• Cash transactions: Deals are often conducted in cash, which lacks transparency and accountability. This is done to avoid paying taxes.
• No guarantee of settlement: There is no assurance of trade settlements, exposing investors to significant financial risks.

Official caution and legal implications

Recently, NSE has identified certain Facebook pages claiming to provide 'dabba trading.' You can keep track of the complete list of these links here.

NSE cautioned investors against subscribing to schemes offered by such Facebook handles, emphasising that dabba trading is prohibited by law. Under the Securities Contracts (Regulation) Act, 1956, anyone involved in such activities can face severe penalties, including imprisonment and hefty fines. Dabba trading is also considered a cognisable offence under the Indian Penal Code.

Conclusion

Dabba trading is risky and illegal. If investors participate in it, they lose several important protections:

• No protection by the Stock Exchange: Normally, if you invest through a legal Stock Exchange, the exchange has rules to protect your investment. But in dabba trading, you don't get this protection.
• No help with disputes: If something goes wrong in legal trading, the Stock Exchange has ways to help resolve the issue. This isn't available in dabba trading.
• No way to address complaints: Normally, if you have a problem with your investment, there's a system to complain and get help. This system doesn't cover dabba trading.

So, while dabba trading might seem appealing, it's very risky because you're on your own without these protections.