Behind Closed Doors: Exploring Illegal Dabba Trading and SEBI’s Regulatory Crackdown.
The capital market regulator is tightening down on gaming applications that provide virtual trading services (or dabba trading) and fantasy games based on real-time share prices of publicly traded businesses. These applications have grown in popularity in recent times as retail investor demand for stock trading has increased. The SEBI has asked exchanges and depositories not to share real-time pricing data with other parties to discourage such operations.
If there is one thing that gives regulators a headache, it is a thriving parallel sector outside their jurisdiction. In May, the SEBI ordered exchanges not to share real-time pricing data with other parties. The regulator’s circular mentioned the potential exploitation of the stock exchange’s live feeds by applications that provide stock market fantasy games, which is outside its control.
SEBI and exchanges hope to stifle the expansion of these gaming applications by denying them live feeds. Even if the popularity of such applications declines due to this crackdown, authorities will only have gained a partial win over this unauthorised market or dabba trading. That’s because stock modification apps may represent only a tiny portion of the modern unauthorised market ecosystem.
So, what is dabba training?
Regardless of its name, Dabba Trading has nothing to do with stock market trading. Rather, it is betting on stock price movements, similar to gambling, which is illegal in India. While the term ‘Dabba Trading’ innocently disguises gambling as a stock market transaction, the only relationship between the two is that bets are put on stocks and market indices. Dabba Trading refers to informal bets put outside of stock exchanges. Most new and prospective stock market participants are unaware of this reality and may unintentionally participate in illicit behaviour. The law holds both organisers and participants in a gambling act liable.
The new headache for SEBI.
Apps offering virtual trading services have proliferated in recent years owing to strong interest among ordinary investors in trading equities. Such users do not engage in real-time trading through stock brokers but instead compete against other participants using fictitious trading techniques and portfolios.
If the data is utilised for educational or recreational reasons, that is OK; but, monetary incentives can’t be permitted based on the success of the virtual stock portfolio,” according to a regulatory official. “That’s like dabba trading, which is illegal.” According to SEBI, market price data can be provided for investor education and awareness efforts without giving monetary incentives to participants and with a one-day lag. It has also asked exchanges to exercise due caution when disclosing similar information. Users of such sites pay a membership fee to trade, and the top performers receive awards.
The SEBI circular effectively indicates that it stops all sites that provide trading competition, demo trading, CFDs (contracts for difference), and more. However, the SEBI’s decision will have no effect on media agencies that provide real-time data feeds.
Gaming based on Real-time feeds is allowed in several developed countries as exchanges get a large percentage of their revenue from such data transmission. However, SEBI says that no one shall provide any game or league based on securities or tied to the securities market.
Historical cases.
A few years back, when SEBI was investigating a case involving businessman Raj Kundra, it found that his firm was receiving data feeds and engaging in gaming activities as a result.
In another case in 2023, a Bombay High Court lawyer filed a police case after being scammed for Rs 1.27 crore by a father-son combination. The defendants had collected money from the lawyer on the premise of investing it in dabba trading and providing 10% of their 20% return. However, the accused failed to provide any benefit to the complaint lawyer, did not refund his money, and went into hiding.
In February 2022, the RBI advised Indian residents not to use forex transfers to trade on unauthorised Electronic Trading Platforms (ETPs). The central bank also cautioned that transactions made under the Liberalised Remittance Scheme (LRS) may result in penalties under the Foreign Exchange Management Act (FEMA). However, according to market participants, this warning did not deter local punters from continuing to trade on CFD platforms.
How will SEBI stop these illegal practices?
There is still a lack of clarity about how authorities will combat the illicit exploitation of this data by larger offshore platforms like CFD (Contract for Difference), which is growing appeal among local daring punters. A CFD is a derivative that allows you to bet on stocks, Forex, commodities, and cryptocurrencies without owning them. Speculators prefer this because it is cash-settled, flexible, and less expensive, with far greater leverage potential than what stockbrokers can provide in the formal mainstream market. The most significant danger of trading on CFD platforms is the lack of a licenced clearing organisation to process deals. There is no legal remedy in the event of a blowup.
Many of these CFD sites use real-time exchange data, often illegally, which adds to their popularity among traders. According to industry players, these platforms or their servers are located in areas with relatively lax legislation. This has made it difficult for the SEBI and exchanges to regulate such platforms adequately. For the regulator, stock market gaming applications might be the lesser of two evils.
Most asset classes have been doing well thus far, but things may change if there are significant, unexpected changes. If authorities are serious about clamping down on locals’ participation in such offshore dabba trading platforms, domestic financial market regulators will require more concerted and forceful action.
The Criminality of Dabba Trading.
The Public Gambling Act (1867) forbids gambling in public places, businesses, and online. Only legally licenced institutions in Sikkim, Goa, and the Union Territory of Daman may operate casinos. However, Dabba trading applications and websites openly tempt naive or hungry people over the internet.
Dabba trading practices also violate specific sections of the Securities Contracts (Regulation) Act of 1956 (SCRA), which are punished under Section 23. According to Section 25 of the SCRA, offences punished under Section 23 are cognisable under the Code of Criminal Procedure, 1973, and so can be investigated by state law enforcement agencies.
Furthermore, Dabba trade operations are subject to Sections 406, 420, and 120-B of the Indian Penal Code, 1870, which address criminal breach of trust, deceiving and cheating, and criminal conspiracy, respectively.
Modus operandi of Dabba trading operators.
Several websites, like vmtrading.in, closefriendstraders.com, and Facebook groups like Dabba Trading With India Box Trader, publicly identify as Dabba trading platforms. However, the allied information on these websites or groups seems to be actual stock trading systems, complete with charts and technical language. To those unfamiliar with Dabba trading, this may appear to be another stock trading site. The benefits these operators list frequently include phrases like Best or Minimum Margins, Lowest Brokerage, 500X Leverage, 24X7 customer service, Quick or Instant Payouts, starting trading with 1,000/-, and more. The benefits appear to be comparable to stock trading platforms, however, with superior bargains and amenities that entice a stock market newcomer.
For more information, the consumer is directed to a WhatsApp number or to complete an enquiry form. From here on out, the potential client is supplied a variety of deceptive information in order to persuade them to pay up and begin Dabba trading. Typically, the consumer loses a bet and loses money to the operator. The operator does not compensate the consumer if he wins. Often, this is when the customer learns he has been the victim of a complex deception.
Why does the Dabba trade survive while being illegal?
If an innocent victim visits the SEBI, they would be surprised to learn that Dabba trading operations are unlawful and fall outside SEBI’s jurisdiction. The victim’s sole remedy is to file a police report. By then, the victim has realised he has been a part of a gambling operation in which he is also an accomplice!
One of the primary reasons for the unapologetic existence of Dabba trading operations is that participants in a Dabba trading operation unwittingly become responsible for engaging in the act of betting and gambling under the Public Gambling Act of 1867. The Act defines both the organisers and participants in an illicit gaming activity as lawbreakers. While the penalty for gambling at an unauthorised institution varies by state, it is a severe offence throughout India. Because the victim may face criminal charges, it is uncommon for any victim of Dabba trading fraud to approach the police and file a complaint.
The bottom line.
The only way to stop Dabba’s trading operations is for authorities to take suo moto action against the platforms and make them accountable under the law.
The long-term and more effective solution appears to be investor education activities by SEBI and other stock market groups. An informed investor would avoid Dabba trading, and a sufficient number of informed investors may cause Dabba trading to die a natural death.
