The Securities and Exchange Board of India’s (Sebi’s) new margin norms may spur ‘dabba trading’ in equities — a parallel market where trades are done based on prices quoted on exchanges but settled in cash off-market.
The rise in futures and options (F&O) contract sizes, along with higher margin requirements, has goaded investors to move to this platform since the past year, said market players. They added that the requirement for upfront margins could push more investors to this segment.
“Dabba trading is catching on like wildfire. Terminals are being circulated, mobile apps are being created, and people being hired to meet the demand. Several authorised people may migrate to this platform too,” said a senior broking official.
Alok Churiwala, MD of Churiwala Securities (stock broking firm), said: “The more difficult we make it for investors to access formal markets, the more they get attracted towards avenues like dabba trading.”
Sebi’s recent rule mandates investors to bring in upfront margins for every trade they do, in the form of cash or shares lying in the demat account that can be pledged. Further, instead of giving power of attorney (POA) to brokers to access shares, investors now have to pledge their shares directly with depositories in favour of the broker.
“The requirement of paying margins upfront would restrict individuals from trading freely, and to that extent, some form of arbitrage could come into play that may give rise to a parallel market. Having said that, this may not be an adequate incentive for most to move to dabba trading yet,” said Sandip Raichura, CEO (retail), Prabhudas Lilladher.
Dabba trading has existed primarily for rotation of black money, i.e. conversion of black money to white, or for taking positions in the market that otherwise a person could not have taken in his name, said experts.
Investors do not have to furnish their PAN, there are no margin or KYC requirements, and no elaborate scrutiny of transactions. Effectively, there is no securities transaction tax, commodities transaction tax, or income tax to be paid since the settlement is in cash, mostly on a weekly basis.
“All the pain points, which are part of the formal exchange trading mechanism, are largely done away with on this platform. The system is relationship-driven and traders do not have to worry about harassment by tax authorities for large transactions,” said the broking official cited above.
Investors do, however, face the risk of settlements not being honoured. “This system is conducive to small and medium players, who have access to sustained cash flows. Large investors will avoid this platform as there is no guarantee of settlement,” said Churiwala.
Dabba trading in equities had come to a standstill following demonetisation in 2016. The platform has seen a surge in activity over the past year, with higher margins coming into play and compliance norms getting tighter for brokers.