Dabba Trading: A complete guide; key risks, how it works, and its legal status in India

Dabba Trading: Investing or trading in the stock market has gained popularity over the years, including in India. Most people have started learning about and trading in the share market after looking at its historical returns and compounding benefits in the long run. However, with a large number of people investing in the Indian stock market, illegal activities have also increased significantly, and dabba trading, or bucket trading, is one such activity.

Beware of Dabba Trading!

Do Not Fall In The Trap Of Quick Returns At Low Cost

What Precautions Should Investors Take?

What Are The Risks & Penalties Involved?

Every Trader & Investor Should Watch This show as we decode the Mystery of #DabbaTrading https://t.co/lBjMxSfo4m

— Anil Singhvi Zee Business (@AnilSinghvi_) June 23, 2023

What is Dabba trading?

Authentic trading in the stock market requires an investor or trader to open a demat account and follow all the regulatory guidelines, whereas, in dabba trading, all translations happen outside the purview of the stock exchanges like BSE and NSE. The word dabba refers to an informal network of operators who conduct off-market deals in securities. It must be noted that in dabba trading all the transactions are settled in cash. The biggest lure of this practice is avoiding taxation. According to Clear Tax, in dabba trading, no income tax is levied on profit. Additionally, traders tend to pay no commodity transaction tax (CTT) or securities transaction tax (STT) on their transactions. Of late, there has been a surge in such activity. Dabba traders have been fraudulently active in both the equity and commodity markets.

Observing these practices, the Securities and Exchange Board of India (SEBI) has taken a number of initiatives to curtail the dabba trading system and encourage investors to buy through traditional, lawful channels.

How does Dabba trading work?

Brokers and investors trade outside the stock market, and orders are placed. The orders are placed through operators, and all transactions are settled in cash every week. The operator books the trade in its record after receiving the order from its client. The operator charges money from its clients to facilitate trades. All transactions are settled in cash every week, explains Angel Broking. The dabba system is a pseudo-market without a settlement guarantee, meaning investors may lose all their investments.

This trade is also carried out in the commodity market while buying and selling gold and silver. Crude oil and copper are also traded in dabba trading. The minimal fee is charged by the dabba traders to trade in listed commodities.

Dabba trading: A new way

Earlier, dabba trading was done through networking and offline, but with technological advancement, there are various applications and software for dabba trading. With the help of the software, transactions take place in various parts of the country.

According to Zee Business research, some of these apps and software are fraudulent, and people lose their hard-earned money falling for these traps.

Who participates in Dabba trading?

There are two types of people who are involved: one who doesn’t understand the mechanism of the stock market and gets involved in dabba trading unknowingly, and the other who wants to avoid paying taxes and the basic charges of the stock transactions.

Risks involved in Dabba trading

Dabba trading has a high fraudulent risk as the transactions are not recorded officially and the operator can abscond due to pressure from various government entities. Dabba trading is generally carried out by operators who deal in huge amounts of shares and absorb the loss or profit, making market box trading a risky venture to consider. Because of the significant risk of settlement, large investors avoid investing in this site.

Why is Dabba trading illegal in India?

Dabba trading has been prohibited in India as no tax is paid for any deal that affects government money. Furthermore, there are no provisions for Know Your Customer (KYC), which might lead to the flow of money to drug trafficking organisations and organisations sponsoring terrorist activities.

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