Rs 50 Lakh Crore Wiped Out From Indian Stock Market: What Is Dabba Trading And Why It Is Gaining Popularity?

Stock Market 2024: With the restless in Indian stock market due to the bears' bandwagon, as much as Rs 50 lakh crore of investors' wealth has been wiped out since its record rally of late-September. Amidst this, there are signs of the return of an old-school trading pattern which is unregulated and market regulator Sebi including exchanges have warned about it. It is called 'Dabba Trading'.

BSE-listed companies market cap touched Rs 428.67 lakh crore in the early trade of November 18, declining by at least Rs 50.26 lakh crore from Rs 478.93 lakh crore on September 27, 2024, when benchmarks Sensex and Nifty recorded fresh new lifetime highs of 85,978.25 and 26,277.35 respectively.

On the other hand, as per the latest news reports, dabba trading has probably reached to Rs 100 lakh crore per day in terms of volumes.

So far, the reason explained for the reported uptick in dabba trading is because of the various regulations and strict guidelines announced by market regulator Sebi. This has led to momentum in dabba trading to lure futures & options traders.

For instance, with effect from November 21, as per Sebi's instructions, both BSE and NSE are set to revise their lot sizes for all new index F&O contracts that are introduced from Thursday onwards.

At present, the size of contract for F&O contracts ranges from Rs 5 lakh to Rs 10 lakh. However, this will increase from Rs 15 lakh to Rs 20 lakh with effect from November 21 on new contracts.

Also, Zerodha on its website pointed out that SEBI has announced that traders will not get any margin benefits for calendar spreads on the day of expiry for contracts expiring on that day from February 1, 2025.

Here is an example, of how traders will not get the margins benefits as per Zerodha:

Let's suppose, an investor has a short option whose expiry date is on January 31, with a margin of Rs 1 lakh, and they also have a long option that expires on February 28th. Now, since the short position is hedged by the long one, you get a margin benefit and need only Rs. 50,000 instead of Rs. 1 lakh.

However, on 31st January, this margin benefit will no longer be available, and you will have to maintain the full Rs. 1 lakh margin.

Additionally, with effect from November 20, as per the new guidelines, BSE and NSE will allow only one weekly expiry contract on one benchmark index. Earlier, NSE offered weekly expiry contracts for 4 indices BSE operated two indices. Furthermore, Sebi has directed to apply at least a 2% Extreme Loss Margin (ELM) on short positions on the expiry day to curb potential risks owing to volatility from November 20 onward.

Earlier, Zerodha's co-founder, Nithin Kamath also pointed out that they are expecting a 10% revenue dip, after SEBI's true-to-label circular went live on October 1, 2024.

In a blog post for Zerodha's 14 years of business, Nithin said, "SEBI recently published a consultation paper on index derivatives that was open to public comments. We expect this paper to materialise into regulation sometime in the next quarter. Index derivatives today are a significant portion of our revenue, and any change will impact us. We anticipate a 30% to 50% drop in revenue. Yeah, this is that regulation that I was referring to in last year's post that can be ..."

He also added that the impact of Securities Transaction Tax (STT) which also went live on October 1, 2024, on options trading could be minimal. However, he is anticipating a significant impact on futures trading.

According to a Financial Express report, a dabba trader said many have taken this route due to lower entry barriers. Some of the key reasons are no margin requirements or formal paperwork, lower lot sizes, and no tax or fees. The platform attracts speculators seeking flexibility and anonymity. Sebi's new F&O guidelines are expected to hit trading volumes by 40%, an exchange source said, but speculators won't exactly vanish. Traders are already shifting to dabba trading and other avenues such as commodities and even gaming platforms.

What Is Dabba Trading?

As per SEBI's guidelines, dabba trading is an illegal and unregulated form of trading in securities. In dabba trading, traders place deals in securities without the trades actually being executed on any official SEBI-recognized stock exchange.

Hence, these trades are settled internally by the dabba operator and are outside the purview of stock exchanges and regulatory bodies.

Since trades are not executed on official stock exchange platforms, investors can not avail grievances redressal mechanism of stock exchanges, as per SEBI.

Thereby, Sebi explained that dabba trade offers no benefits of safe and guaranteed trades done on Stock Exchanges. Hence, investors should exercise caution and should not indulge in any kind of dabba trading.

What are the consequences of dabba trading?

Since dabba trading is unregulated and illegal by market regulators, investors caught in the action could be charged under the Securities Contracts Act 1956 for Dabba Trading. There are repercussions under Sections 406, 420, and 120-B under the Indian Penal Code, 1870 as well. If convicted traders and brokers may face an imprisonment of up to 10 years or a penalty of up to Rs 25 crore, or even both.

Here is a list of risks highlighted by Kotak Securities on dabba trading:

1. Loss of Funds: Traders engaging in Dabba trading risk losing their investments due to price manipulation and fraudulent practices.

2. Lack of Recourse: Since Dabba trading operates outside of official channels, investors have limited recourse in the event of disputes or losses.

3. Legal Consequences: Engaging in Dabba trading can result in legal actions, penalties, and criminal charges, as it violates financial regulations in many jurisdictions.

According to Motilal Oswal, dabba Trading seems like a quick way to make profits without the regulatory pressure for investors and brokers involved. However, the legal consequences make it a dangerous endeavour. It is critical to learn about this fraudulent activity to avoid being a victim or unknowingly engaging in it. SEBI runs campaigns to spread awareness on the same.