What Is Dabba Trading

Dabba trading, also known as bucketing or off-market trading, is an illegal practice in which stock trades are executed outside the official stock exchange system. In dabba trading, brokers act as intermediaries between buyers and sellers and record transactions in their own account books instead of the exchange's order book.

This type of trading is typically done through the use of a software platform or mobile app that allows traders to place orders and execute trades directly with the broker. The transactions are not reported to the exchange, and the prices and volumes of these trades are not reflected in the official market data.

Dabba trading is illegal in India, but it is still practised in some parts of the country, particularly in smaller towns and rural areas. It is generally considered a risky practice, as the lack of transparency makes it difficult to assess the true market value of the securities being traded. Additionally, there is no protection for investors against fraud or malpractice by the brokers.

Why is Dabba trading illegal in India?

Dabba trading is illegal in India for several reasons.

Firstly, it is a violation of the Securities Contracts (Regulation) Act, which requires all securities transactions to be executed through recognized stock exchanges in India. This law is in place to ensure transparency and fairness in the trading process and to protect investors from fraudulent practices.

Secondly, dabba trading is often used to evade taxes and regulations. Since transactions are not reported to the exchange, there is no record of the income generated from these trades, and the taxes owed to the government are not paid. This can result in a loss of revenue for the government and can also create an uneven playing field for legitimate traders and investors.

Lastly, dabba trading is considered a risky practice as it is unregulated and lacks transparency. Investors have no legal recourse if they are cheated or defrauded by dabba traders. Furthermore, the lack of transparency makes it difficult to assess the true market value of the securities being traded, leading to market distortions and instability.

For these reasons, dabba trading is prohibited in India, and those who engage in this activity are subject to fines, penalties, and other legal consequences.

How does Dabba trading work?

Box trading is the name of the dabba system in India, while bucket trading is the name of the system in the United States. Investors can invest outside of the stock market with the help of the broker. Orders are taken by operators, and all transactions are settled in cash once a week. A transaction is recorded by the operator after it receives an order from its client. Operators charge their clients a fee to facilitate trades.

Transactions in the bucketing market are more risky. The illegal nature of the transaction entails counterparty risks and actions by a variety of authorities. Due to the fictitious nature of Dabba, there is no certainty of settlement, which means your assets may go down the drain.

Gold and silver, as well as copper and crude oil, are frequently traded on the parallel market in India.

The SEBI classifies dabba trading as an illegal and prohibited practice under Regulations 3 and 4 of its Prohibition of Fraudulent and Unfair Trade Practices. Furthermore, it violates the Indian Penal Code and the 2000 Information Technology Act.

Risks to dabba or box trading

Dabba trading is riskier because it is unregulated. It is not guaranteed that you will receive a settlement. It is contingent upon another party's loss that a dabba trade will make a profit. Box trading is a risky trade since the operators issue huge orders in the stock market and suffer the loss or profit from the transaction.

Dabba trading has an impact on the entire economy. The system promotes tax avoidance, with thousands of crores being wagered outside the legal system. Government revenue is reduced by thousands of crores as a result.

As for the second point, it's similar to organized gambling, which is illegal in India. Traders deal without exchange or SEBI protection.

Traders will occasionally put massive orders worth crores without having enough cash on hand. Even if you win the bet, you may be unable to collect your winnings from the losing broker or investor. As a result, your money is always at risk because there is no exchange guarantee or margin safety.