The Securities and Exchange Board of India’s (Sebi’s) new margin norms may give a fillip to dabba trading in equities — a parallel market where trades are done based on prices quoted on exchanges, but settled in cash off-market.
The increase in futures and options (F&O) contract sizes and higher margin requirements has goaded investors to move to this platform in the past year, say market players, and the requirement for upfront margins may push more investors to this segment.
“Dabba trading is catching on like wildfire. Terminals are being circulated, mobile apps created and people are being hired to meet the demand. Several authorized persons may migrate to this platform,” said a senior broking official, on condition of anonymity.
“The more difficult we make it for investors to access formal markets the more they will get attracted towards avenues such as dabba trading,” added Alok Churiwala, managing director, Churiwala Securities, a stock broking firm.
Sebi’s recent rule says that investors must 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 a power of attorney (POA) to brokers to access shares, investors now have to pledge their shares directly with the depositories in favour of the broker.
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“The requirement of paying margin upfront would restrict individuals from trading freely and to that extent some form of arbitrage could come into play, which may give rise to a parallel market. Having said that, this may not be an adequate incentive for most to move to the dabba trading platform,” said Sandip Raichura, chief executive officer, retail, Prabhudas Lilladher.
Dabba trading has existed primarily for rotation of black money, converting black money into white or for taking positions in the market which otherwise a person could not have taken in his name, said experts. Investors do not have to furnish a PAN number, there are no margin or KYC requirements, nor any 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.
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“All the pain points that are a part of 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 broker quoted 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 a settlement,” said Churiwala.
Dabba trading in equities had come to a standstill after the government withdrew high denomination currency notes from the system in 2016. The platform has seen a surge in activity it the past year, with higher margins coming into play and compliance norms getting tighter for brokers.