MC Exclusive: Brokerages, APs facilitates dabba-trading to make up for business lost to SEBI's new F&O norms

Brokerages can stand to lose their certificate of registration if they are found to associating with such platforms.

At least two brokerages have found a circuitous and illegal way to make up for business lost to the new index-derivatives rules, particularly the one that caused the reduction in weekly expiries, according to sources.

On October 1, the Securities and Exchange Board of India (SEBI) issued a new framework for the index-derivatives segment, including reducing contracts with weekly expiries, increasing the contract size and charging additional margin for contracts with zero-days to expiry (0DTE). The new norms took effect from November 20 but their impact was felt from the beginning of December.

Brokerages have been expecting a steep fall in their revenues from these norms.

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To protect their earnings, the brokerages have made their dabba-trading apps available to their clients, sources told Moneycontrol. Dabba trading is an illegal activity, which is not routed through regulated markets and involves placing bets on the price movements of stocks and other securities, without actually owning these securities.

According to the sources, their dabba-trading activities are facilitated through entities registered in other countries, to place them outside the purview of SEBI.

These brokers usually have two separate servers to run a parallel platform for dabba trading, one for their routine operations and the other server, located near the original server, for dabba trading, said a person on condition of anonymity.

The money which is sent to a foreign jurisdiction comes back to the brokers in India via hawala, he added.

Another person pointed out that in some cases the money is not repatriated to India. Instead, it may be settled through payments within the foreign jurisdiction itself. For example, the broker may need to pay a vendor in a foreign jurisdiction, or the brokerage's sister concern involved in any other business may need to pay a vendor in that jurisdiction, and these earnings are used for that purpose.

Widely practised

Sources in the industry say that brokerages rarely undertake such risky activities. Brokerages can stand to lose their certificate of registration if they are found to associating with such platforms.

Market insiders say that it is more common for authorised persons (APs) of brokers to direct their clients to dabba-trading apps, which reward the APs with commissions and profit sharing. The number of these incidents had also seen an increase after the upfront margin collection rule was introduced in 2022.

The commissions can go as high as 10 percent of the transaction charges, said a source.

Investors who are used to taking large positions in the derivative segment find it hard to switch to other strategies or settle for lower profits. These investors are easily convinced by APs to try the dabba-trading platforms, according to a source.

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Then there are instances where the APs, who are now seeing a fall in brokerage commissions and profits (from illegal profit-sharing arrangements), do not inform their clients that their orders are being placed on the dabba-trading platform.

They pass on the expenses of trading on these apps as brokerage charges to the clients.

Even when the new index-derivatives rules were announced, market insiders had expressed fears that this would lead to an increase in dabba trading.

They had raised concerns that increased costs would take investors away from regulated markets.