While the 21-day nationwide lockdown announced by the government to curb the spread of the novel coronavirus is taking a heavy toll on the economy, the unprecedented measure has resulted in an unintended positive consequence. Dabba trading, often called off-exchange transaction, that witnesses illegal business worth Rs 3 lakh crore daily, has come to a grinding halt.
The high-risk operations have been stopped as strict restrictions on movement have forced the ‘Dabba trader’ to stop work, at least for the time being.
Dabba trading is essentially informal trading using cash that takes place directly among traders, who bet on stock price fluctuations.
The system works entirely on trust; traders are often allowed to invest without having adequate collateral, and trades are typically cash-settled -- meaning if a trader buys a stock for Rs 100 and sells it for Rs 110, he simply gets Rs 10 after the position is squared off. Since it is not a legal transaction, there is absolutely no transaction cost.
Traders opt for Dabba trading over the formal trading system as the transactions and any gains from it are not subject to taxes such as income tax, securities transaction or commodity transaction tax. It is mainly settled on a weekly basis in cash. The trading mainly happens in equity futures and commodities including agri and non-agri items.
"Trading happens two-three times in Dabba trading unlike in exchanges. As a result, we lose a lot of tax revenue and volume on formal trading platforms," a former senior exchange official told Moneycontrol.
As Dabba trading is based purely on cash, there is a risk of not getting money at the time of trade settlement that happens every week. A prominent Dabba trader in Rajasthan told Moneycontrol: "We have stopped our operations fully since people are not allowed to come out and pay losses. We are only doing a small portion of trade for those clients whose money is already with us."
A Mumbai-based trader corroborated this. "We had communicated to our clients before the lockdown, when the market was going down significantly, that we would not take a position beyond their cash with us. We did not even allow taking long positions when the market was correcting. Usually, we give 2-3 times position limit on their cash. After the lockdown, we had to shut shop," the person said.
Ahmedabad, Kolkata, Surat, Rajkot, Jaipur and Mumbai are the major Dabba trading markets.
Another Dabba trader who deals in commodities said a similar situation occurred during demonetisation in 2016. “Then also, we stopped our business but continued for some selected clients as higher denomination currencies were not available in the market. But this time, the situation is much more severe. We have stopped our business fully due to high volatility and restricted movement," he pointed out.
According to traders, neither they are able to get money if there is a loss nor can they pay money to those who make profits owing to movement restrictions. Moreover, there is high volatility in both commodity and equitiy markets.
For the last few years, police and the Securities and Exchange Board of India have been trying to crack down on Dabba trading. However, the illegal trading flourished, thanks to lower transaction costs and advantages of cash dealings.
Law enforcement agencies also have their own limitations. A senior official of Mumbai Police told Moneycontrol: "We are not allowed to take sou-moto action against this illegal business as per the Indian Penal Code, unless market regulator SEBI registers a case. Our hands are tied if SEBI is reluctant to register a case. In the past also, a major Dabba trading racket was busted by police in Nagpur. But the case first went to the High Court, and now is in the Supreme Court. After that, the Enforcement Directorate has also started investigating this case."
