UNIVERSITY OF MUMBAI

A PROJECT REPORT ON “DABBA TRADING AND REGULATED

STOCK MARKET AFTER DEMONETISATION”

BACHELOR OF COMMERCE (FINANCIAL MARKETS)

SEMESTER VI

2016-17

SUBMITTED BY:

MR. AVINASH BANGA

ROLL NO. - 4

UNDER GUIDANCE OF

PROF: TASNEEM RAZMI

H.R COLLEGE OF COMMERCE & ECONOMICS

VIDYASAGAR, PRINCIPAL K.M. KUNDNANI CHOWK, 123, D.W.

ROAD, CHURCHGATE, MUMBAI- 400020

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 DABBA TRADING AND REGULATED STOCK MARKET AFTER
DEMONETISATION

BACHELOR OF COMMERCE FINANCIAL MARKETS

SEMESTER VI

2016-17

IN FULLFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF

DEGREE OF BACHELOR OF COMMERCE- FINANCIAL MARKETS

SUBMITTED BY-

AVINASH BANGA

ROLL NO. – 4

H.R COLLEGE OF COMMERCE & ECONOMICS

VIDYASAGAR, PRINCIPAL K.M. KUNDNANI CHOWK, 123, D.W.

ROAD, CHURCHGATE, MUMBAI- 400020

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 CERTIFICATE

This is to certify that Mr.Avinash Banga of TY B.Com -Financial Markets

Semester VI (2016-17) has successfully completed the project on DABBA
TRADING AND REGULATED STOCK MARKET AFTER
DEMONETISATION in full fulfillment of Bachelor of Commerce-Financial
Markets (BFM) as per the curriculum laid down by the University of Mumbai
for the academic year 2016-17 under the guidance of Prof. Tasneem Razmi.

PROJECT GUIDE PRINCIPAL

INTERNAL EXAMINER EXTERNAL EXAMINER

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 DECLARATION

I, Avinash Banga of H.R College of Commerce and Economics, Churchgate, a

student of B.Com- Financial Markets Semester VI (2016-17) hereby declare that I
have completed the Project on ‘DABBA TRADING AND REGULATED
STOCK MARKETS AFTER DEMONETISATION’ in full fulfillment of
requirement for third year of Bachelor Of Financial Markets course for academic
year 2016-17.

I further declare the information submitted is true & original to best of my

knowledge.

DATE: ________

PLACE: _________

___________________

SIGNATURE OF THE STUDENT

(AVINASH PRAKASH BANGA)

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 ACKNOWLEDGEMENT

While most people are co-operative and extend their support for academic cause, in
case of studying and researching on this project, it has been more so. The
information given was not only useful but also prompt and timely.

The project on ‘DABBA TRADING AND REGULATED STOCK MARKET

AFTER DEMONETISATION’ has been possible owing to a host of reasons.
Firstly I would like to acknowledge my special thanks and express my gratitude to
Prof. Tasneem Razmi for her kind support in guiding me as to how should I
prepare and proceed with the project. The experience gained during the course of
drafting this project has been deeply enriching. I am extremely greatful to them for
providing us with an oppurtunity to study and focus and very keen stream of Stock
Markets. As Commerce (Financial Markets) students the research done for this
Project will be beneficial for the growth of my knowledge. I am thankful to them
for providing me a basic framework to start the thesis with.

I would like to acknowledge my special thanks to all those people I took help from
while drafting this project report for their extensive support during the research.
Last but not the least I would like to thank my parents for their support and help.

______________

(Avinash Banga)

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 TABLE OF CONTENTS

Sr. No. Topics Pg. no.

1 INTRODUCTION TO DABBA TRADING

Dabba Trading Scenario in India 11
Rise of E-Dabba Trading 13
Advantages and Disadvantages of Dabba Trading 16
Types of Risk in Dabba Trading 18
SEBI reforms to curb Dabba Trading in India 20

2 DEMONETIZATION
Introduction to the concept ‘Demonetization’ 21
Demonetization in India 22
Impact of Demonetization on various Sectors 23
Positive Side Effects of Demonetization in India 24
Negative Side Effects of Demonetization in India 26

3 INDIAN STOCK MARKETS POST DEMONETIZATION

Demonetisaton Phase 29
Positive Effects of Demonetisation 30
SEBI merger with Forwards Market Commision 32
Advantages of the Merger 33

4 DABBA TRADING POST DEMONETIZATION

Demonetisation Effects on Dabba Traders 34
Dabba Trading in Commodities Market Post demonetisation 35
Intterview with a Dabba Broker 37

5  OBSERVATIONS AND CONCLUSION

 Observations 41
Conclusion 42
43
Bibliography

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 PREFACE

The investment and financial planning is increasing in our country as it is

approaching towards development. The motive of taking such a topic for this
project was to throw some light on the illegal side of the stock markets and the
unfair practices of Indian Stock Exchange. It shows how traders trade illegally in
the market and steal away taxes which should be in government’s possesion. It also
shows what are laws made and the consequences if a person found guilty in
performing such frauds. Project also includes investors responsibilities, rights and
duties. Due to lack of knowledge many people aren’t aware of such frauds. It
focuses on investors education about the market and safe investing. There are some
benefits but they come with a huge risk while performing Dabba Trading which are
further discussed in this project. Demonetisation of Indian Currency and its imapct
on various sectors especially Dabba Tarding has been the focus of the research.

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 ABBREVIATIONS

 BSE- Bombay Stock Exchange

 CFD- Contracts For Difference

 EOW-economic offences wing

 FBI- Federal Bureau of Investigation
 FEMA- Foreign exchange management
 FMC- Forwards Market Commision

 FOREX- Foreign Exchange Market

 FNO- Futures and Options

 IPC- Indian penal code

 KYC- Know your customer

 MCX- Multi Commodity Exchange

 MOF- Ministry Of Finance

 NSE- National Stock Exchange

 SCRA- Securities Contract Regulation Act

 SEBI- Securities Exchange Board of India

 SEC- Securities and Exchange Commission

 STT- Securities transaction Tax

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 AIMS AND OBJECTIVES OF STUDY

The project was undertaken to know What is Dabba Trading? How do people trade
in Stock Markets illegally? Why do people trade in Dabba which is illegal and not
in the regulated markets? And the most important what are the benefits that a
trader is gets while trading in Stock Markets by Dabba trading and the risks
associated with it? What is Demonetization? What was the impact of
Demonetization on Indian Stock Market i.e. Regulated Stock Market and the
illegal Dabba Market?

 To understand the concept of Dabba Trading .

 To examine the impact of illegal trading on domestic economy.
 To study the impact of Demonetization on the Regulated Stock Markets.
 To study the scenario of Dabba Markets after Demonetization.
 To understand and study how SEBI is trying to abolish Dabba Trading in India.
 To understand legal framework and consequences of such illegal trade practices.
 To educate the investors about such frauds and how to deal with them.
SCOPE OF THE STUDY

The study is limited to ‘Dabba Trading in Indian Stock Markets’ and

‘Demonetization of Indian currency in 2016’ with special reference to Derivatives
and Commodities Market in the Indian context. Legal framework and protocol to
deal with frauds from Illegal stock market trading are also studied in this project.
The study also includes rules and regulations made by SEBI to deal with such
frauds. The study cannot be said as totally perfect, any alteration may come. The
study has only made humble attempt at evaluating Dabba Trading only in Indian
Context. The study is not based on the International perspective of Bucketing.
Study does not include Dabba Trading in any International markets.

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 RESEARCH METHODOLOGY

The type of research adopted is descriptive in nature and the data collected for this
study is mixture of primary and secondary data. Secondary data is collected from
Newspapers, Magazines and Internet. As there are no books available on this topic
no books are referred. Primary Data is collected by interviewing people having
knowledge on this topic.

LIMITATIONS

 The study was conducted in Mumbai only.

 As the time was limited, study was confined to conceptual understanding of Dabba
Trading in Indian Stock Markets.

DATA COLLECTION

 Primary Data
The primary data was collected by communicating with some friends, teachers and
some brokers who have knowledge about this topic. Interview with a Broker is
included in this project.

 Secondary Data
Secondary Data includes information which was collected mainly from
Newspapers and Websites.

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 CHAPTER ONE

INTRODUCTION TO DABBA TRADING

As a part of the investor education, it is important to know the good as well as bad
practices prevailing in the market. We often read about dabba trading, not being
permitted by the regulators. Many do not know the mechanics, and also the risk
associated with it, till now.

Dabba means box and a dabba operator, in stock market terminology is the one
who indulges in dabba trading. His office is like any other broker’s office having
terminals linked to the stock exchange showing market rates of stocks. However,
the difference is that the investor’s trades do not get executed on the stock
exchange system but in the dabba operator’s books only. A dabba operator acts as
a principal to all the trades and not as an agent of the client. He is a counter party
to the trades, whereas, he should be the Clearing Corporation who guarantees
trades on the BOLT/NEAT system. This kind of operation, where trade is kept
within the books of the operator is called “dabba” in the popular market terms.

A Dabba operator flouts rules and regulations relating to Client Protection, which
includes registrations, margins, transaction, execution and settlements. Not only he
evades the Income tax regulations, which prohibit dealings in cash, but also service
tax rules and many other mandatory requirements.

It may be learnt that the Securities Contract Regulation Act permits securities
transactions only through stock exchanges unless the settlement of the trade is
done on a spot basis i.e. the receipt and delivery of shares happen within 24 hours
of the trade. But a dabba operator allows the client to carry forward the trade, be it

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in cash or in derivative segment for a period, not necessarily prescribed by the
stock exchange. The cash trade is not settled on rolling basis and the derivative
trade may not have a month-end settlement cycle.

In dabba trading, most of the times, neither written contracts are made, nor the bills
are issued .The settlement cycles are authorized by the dabba operator, himself.
There is no daily mark to market settlement if the trade is in client’s favour,
whereas losses are extracted regularly from the clients.

This presents before us the picture of an outlaw practicing amidst us, the organized
price discovery mechanism of stock exchanges to run an illegal business, while
maintaining the façade of a stock market broker. It is a criminal offence, not much
different from smuggling or black marketing. As a result, frequent raids are
conducted on dabba trading operators in which their computers and records are
seized. Those working in his office are also taken in the custody just like drunkards
found in the illegal toddy shop. The Gujarat police has conducted several raids in
the past and alerted citizens. Media has also played its role in reducing the menace
of dabba trading.

Some dabba traders hedge their positions in the market by partly executing the
trade in the market, maybe in their own proprietary accounts or some benami
names. Dabba traders disappear when the market goes against them, resulting in
huge losses for their clients. The brokers who permit such activity in their branches
or even sub-broker’s offices are the affected parties. Stock exchanges take
complaints against dabba trading very seriously and enforce strict penalties. Even
suspension is levied, if stock exchange inspections confirm the complaint. As
Sensex jumps, resulting in the spurt in trading activity, dabba traders bounce back
in the business. Hence constant vigilance is required. Most important, people
should not patronize such traders.

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The clients patronizing such dabba traders may find some short-term benefits here.
They do not follow ‘Know Your Client’ norms; fill cumbersome forms, sign long
agreements and requirements like PAN card. Margins are bypassed and leveraging
is freely available. Unaccounted cash is used for making payments rather than
making payment by cheque. It must be understood that dabba traders are fair
weather friends. They seldom honor their commitments, particularly when market
is against them. Dabba shops close overnight, with traders disappearing from the
locality. They go to the extent of employing goons for the recovery of losses. In
such a case, neither Stock Exchange Arbitration is available to the investor nor
there is any access to customer protection funds. The Security blanket provided by
the Security Market Regulations is also not there.

Dabba trading, a method by which shares are traded after bypassing the stock
exchange. It is prohibited as it amounts to running a parallel market, free of all
rules and regulations. There are no guarantees of pay-in and pay-out as there are no
written contracts and no invoices or bills are issued. The settlement cycles are
decided by the dabba operators themselves.

It is a criminal offence, no different from smuggling or black market trade. As all

transactions and client details are kept opaque, it is a major contributor to black
money in the country.

DABBA TRADING SCENARIO IN INDIA

“Surat is the hub of dabba trading in Gujarat. Ahmedabad, Rajkot and Bhuj are
other large trading centers. Recently, smaller towns like Unjha, Visnagar, Palanpur
in North Gujarat and Dhoraji, Upleta and Morbi in Saurashtra are also contributing
significantly to the volume of business,” an operator said.

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Sources in the market say that the total volume of trade transacted through dabba
trading is as high as the total volume of trade in the derivative segment of the
National Stock Exchange (NSE).

“It is difficult to have a clear idea of the total dabba trading volume in the country.
However, Gujarat’s volume is an estimated Rs25,000 crore a day”. This is almost
double since SEBI and the stock exchanges changed the margin rules in September
2011.

The National Stock Exchange (NSE) recently asked stockbrokers to discontinue

depositing shares of clients to fulfill margin requirements of the exchange. Also,
delayed payment norms were made stricter. The NSE has also started levying
penalty on margins shortfall at the rate of 1% per day of the amount of shortfall.

Speculators find dabba trading attractive as most of the trade is done in the futures
market. A client can short-sell (selling without holding the delivery) and go long
with whatever quantity he deems fit.

While the cost of equities trading, including brokerage, in the US and Europe is
around Rs500 on trades worth Rs1 crore, it is as high as Rs1,200 in India.
Additionally, a client of the Bombay Stock Exchange (BSE) or the NSE has to
shell out taxes, transaction fees, brokerage, and commission. As dabba trading
bypasses the exchanges, it is a much cheaper mode of buying or selling shares in
India.

To give an example, for an investor desirous of going long or short on Reliance

Industries Limited (RIL) in the derivatives segment, the lot-size per contract is 250
shares of the company. To trade, the investor needs to deposit at least 16% of the
total value of the shares as margin money. Margin money being mark-to-market

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means the investor’s requirement of margin money increases or decreases
depending on rise and fall of the prices of the share.

In contrast, in dabba trading a client can buy or sell even 25 shares of Reliance as
there are no standard contracts. There is no requirement of margin money. As the
entire transaction is executed through a pseudo-channel there is no requirement of
compliance, and transaction taxes. And to top it all, there are no taxes on capital
gains or loss at the end of the year, as most settlements are done in cash.

RISE OF E-DABBA TRADING

Dabba traders have also modernized their operations to counter the threat of SEBI
raids and increased policing.“Large brokers now do not maintain a notebook or
register. They do not even record the transactions on a computer. There is software
available in the market which does the job for them,” a software vendor said on the
condition of anonymity.

This software is installed on the normal terminal provided by the official broker or
exchange. For transaction, it continues to use the official software provided by the
exchange.

“But when the dabba trader calls, he punches the price and quantity of the stocks to
be bought or sold, in the terminal. He executes the trade but without getting it
registered on the exchange as they are blocked by this ‘killer’ software. All dabba
trades are blocked and grouped into a separate file for the weekly settlement,” a
software vendor said.

A mobile application has also been developed for dabba traders. For a three-month
subscription of Rs1,800, a trader will be able to track live market rates from
anywhere in the country. This application is mostly used by front operators who
don’t have huge clientele or volumes.
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Who participates in dabba trading?

Any individual can participate in dabba trading. The only requirement is access to
someone who knows a dabba operator. A personal introduction on the credentials
of the client is a precondition to get into the inner circle of dabba trade. In India,
the Securities Contract Regulation Act permits securities transactions only through
stock exchanges. Hence, dabba trading is illegal.

ADVANTAGES OF DABBA TRADING TO AN INVESTOR

a) Avoids Tax
 Dabba Trading avoids tax payments to the government, transaction tax
payment to SEBI, tax payments towards Ministry of finance, Capital gains
tax to income tax department.
 It saves money but in an illegal way it benefits the investor.
b) Allows investing black money
 Traders can invest their black money in dabba trading as dabba trading is
based only on cash transactions.
 India’s biggest problem is black money which is not accounted in any books.
 Corrupt people those who want to hide their money can invest in dabba
trading to temporarily hide their money.
c) No demat account required
 In Dabba trading demat account which is compulsory for dematerialized
securities according to SEBI are not required.
 Dabba trading deals only in derivatives i.e. FNO and Commodities Segment
of the Stock Market.
 Equity shares are not traded in a Dabba Trading firm.

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 No Contract notes are made in Dabba Trading.
d) No Margin Requirements
 In a legal trade SEBI has made it compulsory for trader to deposit margins
before trading to avoid the counter-party risk associated with the trade.
 But in Dabba trading no margins are required, an investor can trade freely
and make profits or losses.

DISADVANTAGES OF DABBA TRADING TO AN INVESTOR

a) Brokerage
 Brokerage charged on Dabba trading is very high as compared to a legal
transaction made on a Stock exchange.
 As taxes are avoided broker charges very high brokerages to the trader.
b) Counter-party Risk
 There is a huge risk of default if a trader makes profit broker might default
the payment of profit and if a trader makes a loss the risk is shifted to the
broker, trader might default his payment.
 In this scenario a trader can go bankrupt or a broker can go bankrupt.
 Risk is not only limited to the profits and losses but also on the payment of
principal.
c) Illegal and Fraud
 Dabba trading is a fraudulent and illegal trading it violates certain laws and
certain SEBI rules and regulations.
 There is always a risk of legal action against the broker or trader if he/she is
caught doing such frauds.

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 If a broker is found to be involved there are strict actions taken against him
and he might face life imprisonment on committing such frauds.
 Records of Brokers are also scanned and it may reveal trader’s identity and
the investor also might face some legal actions against him/her.
 Black Money plays a huge role in Dabba Market. Many traders trade in
Dabba Markets just to hide income and invest and multiply their black
money.

TYPES OF RISKS INVOLVED IN DABBA TRADING

 Default Risk
Default in settling a trade by a broker or a trader is known as Default Risk.
There is no counter party involved in Dabba Trading and the Counter party
risk is between the broker and the trader.
 Legal Risk
Dabba Trading involves violation of many laws and Rules & regulations laid
down by SEBI. There is a chance a trader or a broker might get caught by
the concerning departments like Income Tax Department, SEBI etc.
 Market Risk
Market Risk is a normal market risk due to which market reacts positively or
negatively volatility or changes in interest rates or any sentiments in the
market
 Knowledge Risk
Dabba Trading is a new concept and not known to many as it originated in
India in 2003. Investors might not have any knowledge about how the
market works or where his money is being invested. The trader but be

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 unaware that how and from where money is being invested into Dabba
Trading it might involve money related to terrorism, smuggling, fake notes
etc.
 Political Risk
Political risk is change in government policies due to which the Dabba
market and The Regulated Stock markets are hugely affected.
Demonetization is one of the biggest example that can be related to the
political risk.

It is an offence to indulge in dabba trading and know the rules and

regulations as ignorance is no excuse.

 The practice of “Dabba Trading” is covered under Regulation 3 and 4 of

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Markets) Regulations, 2003 & is punishable under Section 15 HA
of SEBI Act, 1992.
 Dabba Trading also attracts Indian Penal Code and Information Technology
Act, 2000 apart from the provision of SEBI Act

Social Responsibility
 India is a force to reckon with and thus traders should not tarnish her image
as they have achieved a “Place of Pride” and thus it is the moral
responsibility to report all instances of dabba trading in a locality. Healthy
market is the foundation of wealth creation and Police is doing its bit by
raiding at all premises indulging in dabba Trading. Making sure that one
keeps always from all these mal practices and trades responsibly through the
stock exchanges only. The traders who are trading through dabba should
leave this methodology and use the proper transactions.

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SEBI GOES DIGITAL TO SPREAD AWARENESS ON FINANCIAL
EDUCATION

In a fervent attempt to promote financial education and investor awareness,

Securities and Exchange Board of India (SEBI) has set forth plans to utilise digital
advertising at cinemas and other digital social platforms including TV channels,
radio and print media.

Recently, SEBI launched social media campaigns of schemes like 'Ponzi menace'
and 'Dabba trading' along with campaigns on investor grievance redressal
mechanism and applications support by blocked amount ASBA facility.

Apart from social media campaigns, SEBI has also planned to extend financial
market education and training among teachers and police officials. The market
regulator is also planning to promote financial education through fairs and
exhibitions.

In order to accomplish the task of achieving financial literacy, SEBI will also elect
new resource persons (RP), with a plan to undertake training of all the eligible RPs
across the country. Periodic follow up meetings will also be conducted at the
headquarters and also at the regional level to realise the campaign's full potential.

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 CHAPTER TWO

DEMONETIZATION

DEFINITION of 'Demonetization'

Demonetization is the act of stripping a currency unit of its status as legal tender. It
occurs whenever there is a change of national currency: The current form or forms
of money is pulled from circulation and retired, often to be replaced with new
notes or coins. Sometimes, a country completely replaces the old currency with
new currency.

There are multiple reasons why nations demonetize their local units of currency:

 to combat inflation
 to combat corruption and crime (counterfeiting, tax evasion)
 to discourage a cash-dependent economy
 to facilitate trade
 to counterfeit fake currency notes

Some of the examples of demonetization are –

 America demonetizing silver as a legal tender of United States to favor and

fully adopt the gold standard in 1873 several coins were demonetized
leading to five year depression of economy.
 In 2015, the Zimbabwean government demonetized its dollar as a way to
combat the country’s hyperinflation, which was recorded at 231,000,000%.
The three-month process involved expunging the Zimbabwean dollar from
the country’s financial system and solidifying the U.S. dollar, the Botswana

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 pula and the South African rand as the country’s legal tender in a bid to
stabilize the economy.
 One of the recent examples of Demonetization is of Indian Currency when
Mr. Narendra Modi the honorable Prime Minister of India on November
8,2016 announced demonetization of Indian Rs.500 and Rs.1000 notes to
curb and fight against the black economy, counterfeit the fake currency in
Indian Economy and to fight against Terrorism.

India's Demonetization

In 2016, the Indian government decided to demonetize the 500- and 1000- rupee
notes, the two biggest denominations in its currency system; these notes accounted
for 86% of the country’s circulating cash. With little warning, India's Prime
Minister Narendra Modi announced to the citizenry on Nov. 8 that those notes
were worthless, effective immediately – and they had until the end of the year to
deposit or exchange them for newly introduced 2000 rupee and 500 rupee bills.

Chaos ensued in the cash-dependent economy (some 78% of all Indian customer
transactions are in cash), as long, snaking lines formed outside ATMs and banks,
which had to shut down for a day. The new rupee notes have different
specifications, including size and thickness, requiring re-calibration of ATMs: only
60% of the country’s 200,000 ATMs were operational. Even those dispensing bills
of lower denominations faced shortages. The government’s restriction on daily
withdrawal amounts added to the misery, though a waiver on transaction fees did
help a bit.

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Small businesses and households struggled to find cash and reports of daily wage
workers not receiving their dues surfaced. The rupee fell sharply against the dollar
(see chart).

The government’s goal (and rationale for the abrupt announcement) was to combat
India's thriving underground economy on several fronts: eradicate counterfeit
currency, fight tax evasion (only 1% of the population pays taxes), eliminate black
money gotten from money laundering and terrorist-financing activities, and to
promote a cashless economy. Individuals and entities with huge sums of black
money gotten from parallel cash systems were forced to take their large-
denomination notes to a bank, which was by law required to acquire tax
information on them. If the owner could not provide proof of making any tax
payments on the cash, a penalty of 200% of the owed amount was imposed.

IMMIDIATE IMPACT OF DEMONETIZATION ON INDIAN

ECONOMY

Alternative Funds
Soon after the announcement, people rushed to buy gold, a demand that drove
prices up, in some cases even to a 60% premium, prompting the tax authorities to
conduct surveys. The government emphasized the need to furnish PAN (Indian
Permanent Account Number) card details on purchases for accountability
purposes, and many jewelry shops that were flouting the norms came under
crackdowns. Simultaneously, rumors of a gold ban started to float, which led to
agencies ramping up the volume of gold imports – to around 100 metric tons
during November, the highest since 2015.
Many Indians switched to alternative payment avenues – a big deal in a country of
1.2 billion with only 25.9 million credit cards and 697 million ATM cards as of
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July 2016. The biggest gainers were mobile wallet companies that offer ease of
transactions through a large network of partners. Alibaba (NYSE:BABA)-backed
Paytm saw a sevenfold increase in overall traffic and a 10-fold jump in money
added to Paytm accounts. It also saw the number of transactions double to five
million a day.

App downloads for Paytm increased by 300%. Paytm rival MobiKwik also saw its
app downloads quadruple and a 20-fold increase in money added to the wallets.

Prepaid cash cards were another option that customers found useful, and that meant
good news for companies like ItzCash. Other alternatives include mobile payments
systems linked to e-commerce businesses like Ola Money, FreeCharge, Flipkart
Wallet. Ola Money, the payment portal for popular transportation app Ola Cabs,
reported a 1500% jump in money added to the accounts in less than four hours.

Interest in Bitcoin also spiked Zebpay bitcoin exchange was now adding about
50,000 new users per month. An increased demand for bitcoin was seen and India
clearly has shortage of supply, making the demand and lack of liquidity push up
prices of bitcoin as compared to global exchanges. The virtual currency was
trading at INR 55,735 in India in November (about $836), compared INR 47,725
(about $712) elsewhere.

POSTIVE SIDE EFFECTS OF DEMONETISATION

 Increase in use of plastic money, e-wallets, e-banking, cheques etc.

 Decrease in illegal activities like Dabba Trading, Human Trafficking,
Decrease in illegal drug trade, Hawala trade and Satta Bazar got a hit.
 Data of transactions has been created and money which was not accounted
previously got accounted

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The Modi government first sold this move as a surgical strike on black money.
The exercise seems to have failed as most of the outlawed currency has come
back into the banking system, indicating that most untaxed wealth may have
been laundered.

Yet, if news reports are to be believed, demonetisation has had a positive

impact in certain respects. Here are at least four ways in which this has
reportedly happened:

Human trafficking has been severely hit: A 22 December report in The

Guardian newspaper said that illegal sex trafficking has been massively hit by
the note ban. Citing advocacy and rescue groups, the report said that the illicit
trade is down by as much as 90% since the government sucked old currency out
of the system.

Other reports by news agencies such as Reuters also cite similar stories of
demand for commercial sex having gone down drastically as people simply do
not have much spare cash. Each year, India sees more than 135,000 girls
trafficked into sex trade, with more than 18 million people living in slavery.

Illicit drug trade has taken a beating: A 5 December report by The Indian
Express newspaper from Mumbai said that drug-related cases fell to less than a
third in the city, as demonetisation had hit illicit drug cartels hard. Citing data
from the Anti Narcotics Cell of the Mumbai police crime branch, the report said
that only 200 drug-related cases were recorded in November compared with
700 in October.

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 A 10 December India Today report said that, hit by the cash crunch, suppliers
were pushing cheaper drugs and were mixing grains of chocolate malt drinks
into opium, to cut costs.

‘Dabba’ trading and ‘satta’ bazaar at a standstill: The most dramatic impact
of demonetisation has perhaps been felt in the illegal ‘dabba’, or off-exchange
share trading market, and the ‘satta’ bazaar, or the betting market. Reports
immediately following the note ban said that soon after Modi’s dramatic
announcement, there was a scramble to settle trades in these illegal markets,
which are essentially off-book parallel trading centres dealing with stocks,
political and sporting events.

Hawala trade is down: The ‘hawala’ market reportedly came to a sudden halt
following demonetisation. A 10 November India Today report said that one
Mumbai-based hawala operator apparently destroyed old currency notes worth
as much as Rs 500 crore within a day of the announcement. There have been
several reports of Enforcement Directorate and income tax officials raiding
hawala operators across the country in the last month and a half.

NEGETIVE SIDE EFFECTS OF DEMONETIZATION

 Hardship for marginal/middle income workers

 Creation of another shadow economy
 False feeling of black money “destruction”
 Stressing payment infrastructure
 Contraction in consumption

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Hardship for marginal/middle income workers : Although the target for this move
was the perceived black money hoarders (more on that next), the real people
getting crushed are laborers, maids, farmers who do not have access to any
accounts and are most susceptible to the fear mongering that says that their money
“is worthless”. Most don’t even know that the money can be changed later. They
would become prime targets for the new currency black market where their old
notes are taken at a discount, destroying savings and the little wealth they had in
panic. Creation of another shadow economy: People are already buying and selling
the old notes in a parallel black market. People desperate for cash are already
exchanging 500 notes for 400 INR - for the seller of the new notes it’s a windfall
gain. A lot of wealth will simply be transferred to people who own legitimate
currency and are willing to sell it at a premium. False feeling of black money
“destruction” : The major reason for this move is doing away with black money,
and the irony is that cash is the least preferred method of holding of black money
(if you were evading tax, would you keep cash lying around?). Most of it exists in
gold, assets and a myriad of other instruments that makes it hard to detect.
Additionally, individuals evading tax are only going to temporarily and marginally
hit - as this article wonderfully explains. Stressing payment infrastructure : To say
that the move will migrate a country of 1.2 billion people to the digital payment
infrastructure is more of wishful thinking. Banks don’t exist for miles in rural
India, India has an absymally low 1,082 PoS terminal for a million people and
digital wallets are largely an urban phenomenon. To expect such infrastructure to
magically appear overnight to facilitate cash conversion as well as migration to a
“digital” economy is downright bizzare. It’s fairly visible that the ATMs in India
can’t deal with this, and there are people dying while trying to withdraw cash.
Contraction in consumption: This is definitely a short term effect that runs opposite
to the effect of a well laid out demonetization. With people having no legal tender,
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most shops and outlets are running with zero footfall and people are buying small
ticket items (or even large ones) in smaller quantities. Shopkeepers are resorting to
credit and don't have any PoS in place to feed any demand; many are having to
turn back customers because they can't service their payments.

Demonetization by itself has its merits and demerits, but the sudden nature of this
execution has created more negative externalities than positive outcomes and they
are largely on the honest public. The announcement could have been made for a
later date (say end December) - consumer expenditure would have gone up
subsequently to use cash and the GDP could have taken a positive turn. The
argument that it was sudden to catch black money hoarders unaware is on weak
footing because they will still go largely unscathed, as I have elaborated.

The continuous changes to what can be allowed in exchange for cash, the long
queues at ATMs, generous bank employees willing to stay longer for helping
people are clear indicators that the move was poorly thought out. An argument that
we as everyday people must smile and truly bear the pain for a greater cleansing
(that is not really happening) is weak.

Bold and audacious moves are great and welcome, but they should be thought out
first.

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 Chapter Three

INDIAN STOCK MARKETS POST DEMONETISATION

Sensex is expected to rise this year but it may not scale record highs predicted a
few months back, mainly because Prime Minister Narendra Modi's shock currency
ban is seen knocking economic growth in the next few quarters.

Indian shares fell over 6 percent a day after the Nov. 8 announcement by Modi
outlawing high-value bank notes, coinciding with a shakeout in global financial
markets after Donald Trump's victory in the U.S. presidential election.

What demonetization did from an equities perspective is it added to an already

lengthy list of risks, such as a impending Fed rate hike, Trump's win, corporate
earnings slowdown and investor flight to higher-yielding assets.

While there were concerns Modi's demonetization drive, aimed at curbing

corruption and tax evasion, will put the brakes on the economy, a more immediate
risk was its impact on foreign investors who had already begun moving out of the
country.

In November alone, foreign investors sold nearly $3 billion worth of Indian stocks
- a trend that could have extended in a milder form until a sufficient amount of
cash seeps through the economy and rekindles consumer demand.

By mid-2017, it was forecasted to reach 28,500 and then to 29,600 by the end of
next year. But it’s still the first quarter and Sensex has touched 29800 in its post
budget and election phase which is a big positive for the Indian Economy.

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That is significantly lower than the 32,000 points analysts predicted for end-2017
in an October poll, which would be a new record.

Expectations for the broader NSE index were similarly downgraded. By June 2017,
it was expected to rise further to 8,775. But the same thing has happened to Nifty it
has conquered the 9000 mark easily and according to the recent figures Nifty has
made a high of 9200.

After-effects of demonetization were a bigger threat to Indian stocks over the

coming year than the prospect of faster rate hikes from the U.S. Federal Reserve or
Trump's protectionist policies.

Positive side to the market post demonetization

Fearing demonetisation-like action from the government and faced with

intermittent raids by the market regulator, several dabba traders have shifted to
organised trading platforms across the commodity, equity and currency sectors.
Major beneficiaries of this shift are discount brokers, whose transaction costs are
much lower than those of full-service brokers.

As a result of this, the three leading discount brokers, Zeroda, Samco Securities
and 5paisa.com, with a cumulative market share of around 90 per cent, have seen a
sharp 15-20 per cent growth in their membership base and 20-25 per cent growth
in business volumes over the past three months.

Trade sources estimate there are around 25-30 dabba operators each in all major
centres including Mumbai, Nashik, Surat, Ahmedabad, Vadodara and Indore, with
thousands of trading members dealing fully in cash. But, their business came to

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standstill due to the liquidity crisis following demonetisation in November.

"A lot of traders have shifted to exchanges after demonetisation. So, not only
discount broking but also full-service brokers have seen a sharp increase in new
enrolments post demonetisation. Dabba traders dealing in cash went out of the
system after demonetisaion. Since they want to remain in business, they are
gradually coming to the organised system of trading. Around 15-20 per cent
growth in new members' enrolment and 20-25 per cent growth in business is
observed in the market. The India Infoline (IIFL)-backed 5paisa.com, one of the
fastest growing online financial services providers, sees huge opportunities in
growing the discount brokerage market in India. Discount brokers like 5Paisa are
online stock brokers offering cheap brokerage plans to retail and institutional
investors in India.

Planning to list on the stock exchanges in July this year, 5Paisa estimates the
discount broking market will contribute to as much as 50-60 per cent of total retail
turnover within the next 2-3 years. This prediction is backed by the fact that the
concept of discount broking in India was drawn from the US, where 70 per cent of
retail volume happens through discount brokers.

With technology and mobile penetration at the forefront, retail broking in India is
poised to witness a tectonic shift. Discount broking will not just grow
exponentially and take large chunk of market share in next 3-5 years but will also
expand the retail participation in stock markets.

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Post demonetisation, 5paisa.com has added around 100 new members, with its
business volume rising to Rs 15,000 crore a day now from Rs 12,000 crore early
November.

Traders' major benefit is the cost of transaction, which works out to nearly a third
that of dabba traders and less than a fourth of full service brokers. So, the shift
from unorganised to organised trade has been happening more aggressively now
than ever before.

While the count of regular brokers has been on the fall over the past three years,
discount brokerage has been rapidly gaining popularity with retail investors as they
offer a flat brokerage rate irrespective of the trade size as compared to traditional
full-service brokers who charge a certain percentage of the trade value.

The government had taken the market by surprise with demonetisation. Traders do
not rule out similar action to flush out cash trade. Apart from that, Sebi has also
been taking actions against dabba traders to catch hold of cash business dealers.

SEBI merger with FMC (Forwards Market Commision)

The proposed merger of FMC with SEBI to create a unified markets regulator has
sounded a death knell for the illicit ‘dabba trading’, estimated to have a turnover of
up to one lakh crore rupees a day.

Prevalent across Gujarat and many other parts of the country, dabba trading
primarily involves illicit off-market trades in many commodities, while stocks are
also traded in this illegal market.

In commodities alone, the overall dabba trading clocks turnover to the tune of Rs
50,000-1,00,000 crore a day, while the volumes for illicit stock trades outside the
purview of stock exchanges also run into tens of thousands of crores.

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While regulators and enforcement agencies have been trying hard to curb this
menace for a long time, the lack of a unified regulatory mechanism has so far made
it difficult to fully control this problem.

The efforts to check this menace are likely to get a major boost with SEBI being
given the jurisdiction to regulate commodity markets as well following FMC
merger, as the capital markets regulator already enjoys greater powers including
those to conduct search and seizure, impose penalties, order arrests and take other
strict actions against wrongdoers.

In Union Budget on February 1, 2017, Finance Minister Arun Jaitley proposed to

merge the commodity markets regulator FMC (Forwards Markets Commission)
with the capital markets watchdog SEBI (Securities and Exchange Board of India)
“to strengthen regulation of commodity forward markets and reduce wild
speculation”.

He also said a properly functioning capital market needs proper consumer

protection and a Task Force would be put in place to establish a sector-neutral
Financial Redressal Agency to address grievances against all financial service
providers.

ADVANTAGES OF THIS MERGER

 The merger of FMC with SEBI will streamline the transaction processing
marketplaces in India.
 It will also bring consistency in practices, regulations and operations for
exchanges, exchange members, investors and traders including a single
KYC.
 The merger of FMC with SEBI would strengthen the regulations in
commodity future market.
 SEBI has penal powers of raid, search, fine and to take criminal actions
against wrong doers, thus improving market integrity.

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 Chapter Four

DABBA TRADING POST DEMONETISATION

Demonetisation Effects on Dabba Traders

The government's demonetisation scheme has sounded the death knell for dabba
traders involved in banned equity and commodity trades done outside bourses as
well as punters in satta bazzar or illegal betting market. There was a scramble to
settle trades in these illegal markets, which have emerged as parallel trading
centres for shares and betting on sports and election.

On November 8, 2016 announcement of demonetisation scheme was a jolt for

dabba traders, who were thriving in equity markets for many years now. Although,
settlements could not be reached, most were trying to figure if gold or other such
instruments would be a better option for settlement. Circulation of new notes was
eagerly awaited and till then most were converting their cash to gold. “Dabba,
derived from the term bucketing, is the most infamous way to trade in stocks in the
US, before the Securities and Exchange Commission came into existence. In India,
in states like Gujarat, Rajasthan, Delhi and Maharashtra, dabba trading became
attractive due to rising trading cost and strict regulation. There is no brokerage or
statutory cost for trading in dabba and margin requirement too is thin.

All illegal practices in equity and commodity markets were believed to die a
natural death after the demonetisation scheme. There is no scope for cash-related
settlement anymore. Over the past many years, dabba trading has been blamed for
taking away activity from stock and commodity exchanges. According to the
sources Some Grey market operators’ say that the volumes in the illegal market
have been multiple times that on exchanges.

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In equities, two types of dabba trading were happening. Pure dabba is done
throughout the day taking rates from exchanges and later giving their own quotes
based on expected movements of the next day. The other kind of trade is done
during market hours, where trades are made at the rates at which deals are
happening on official platforms. On the official platform, even one share or one lot
is traded at a particular time; in dabba, that trade becomes the benchmark at that
moment for any number of lots. However, when position increases beyond what a
trader can take on himself, he hedges that on the official platform. “Such official
platform positions were squared off in the morning on BSE-NSE today
(Wednesday) and commodity dabba did so yesterday (Tuesday) night,” said one
dabba broker. Part of the market volatility in equities and commodities can be
attributed to such squaring-off.

Dabba Trading In Commodities Market Post Demonetisation

In the commodity market, `dabba trading' resembles this betting circuit. The rules
of engagement are rudimentary. The participants know each other and there is a
high element of trust. They trade in commodity futures based on say NCDEX
prices and settle their transactions as per internal rules. There is no membership fee
in the formal sense and there may or may not be any margin requirement. There is
no tax paid as it is not formal and the transactions are hard to trace as they often
may be oral or just noted down on paper. It is much like the gambling that takes
place on Mumbai local trains every day where settlement takes place when the
train reaches Borivali or Churchgate station. There is no commodity exchange to
deal with and hence this market is beyond the purview of regulation of Sebi. This
makes it a unique market given that it is efficient. With all settlements being in

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cash 500 and 1,000 notes are important for dabba trade. The demonetisation move
is a blow for such trading which has come to an end abruptly. This is actually a
chance for the commodity exchanges to work towards bringing them on the
organised platform. Simultaneously, there would be an incentive for them to do so
as there is uncertainty relating to the future of dabba trading. The futures market
can expect to see enhanced activity especially in agricultural commodities which
were preferred on dabba as margins tend to be higher than for bullion on
recognised exchanges. Volumes on dabba trade are estimated to be at least a
multiple of 2 to what transpires on organised platforms and is concentrated in
commodities like guar seed, castor seed, mustard and soya where there is vibrant
trade on NCDEX. The erosion of volumes in such trades would mean migration to
organised platforms which is good as it will add more depth to the market.
Exchanges have to gear up to ensure that there are firm surveillance processes
besides the basic KYC norms being adhered to. As this market has been through
various cycles involving withdrawal of contracts, getting dabba traders on board
will be beneficial as the price discovery process would get sharper considering that
a large number of these players are in the physical market and are better able to
take positions in the market. This could be a turning point for the commodity
futures market if the story unfolds in the aforesaid manner.

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INTERVIEW WITH A DABBA BROKER

This interview was taken on one condition that the name of the interviewee
wouldn’t be disclosed as the topic of this interview is not legal.

Interview Questionnaire

1. What is a Dabba Trading?

2. Are there any types of Dabba Trades which are differently performed?

3. What was the scenario of Dabba Markets on November 8, 2016?

4. How did the dabba traders settle their trades in demonetization phase?

5. Do you think that people will quit Dabba Trading and shift to the regulated

market?

6. Why do people choose Dabba Trading over Legal and Regulated Trading in

Indian Stock Markets?

7. Post Demonetisation phase how is Dabba Trading still working?

8. What is the Expected impact of demonetization on dabba trading?

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Answers-

What is a Dabba Trading?

Dabba Trading is basically when you don’t want pay any kind of taxes to the
government for trading in the Stock markets dabba trading is a kind of trading that
allows you to do so, and if you want to invest your black money it is possible to
invest that through Dabba Trading without any paperwork .

Why do people choose Dabba Trading over Legal and Regulated Trading in
Indian Stock Markets?

There are few reasons that people choose Dabba over normal markets-

1. Black money
2. No paperwork
3. No tax payments
4. Cash settlements
5. No KYC, No paperwork and flexibility to trade at any volume in any stock .

Are there any ‘types’ of Dabba Trades which are differently performed?

Dabba trading is popular with those looking to make a quick buck from the stock
market without any regulatory or tax implications. There are no margins to be
maintained with the broker, no securities transaction tax or stamp duty to be paid to
the stock exchanges, and no income-tax to be paid in case of a profit. Everything is

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settled in cash. Dabba Trading is of 3 types- First one is very similar to trading in
the stock market, the prices of the stocks change according to the market and
everything else is same except no paperwork and settlement in cash. Second one is
dabba brokers who match offsetting orders amongst their clients, rather than acting
as the counterparty to their clients' orders. These brokers are happy with the
commissions they earn on the trades and do not take much risk, even if it means
lower earnings. Third one is Pure dabba is done throughout the day taking rates
from exchanges and later brokers give their own quotes based on expected
movements of the next day.

What was the scenario of Dabba Markets on November 8, 2016?

November 8, 2016 when the announcement of demonetization happened it was a

Jolt for every trader in Dabba Market. Everyone wanted to settle their trades but no
one really knew what was coming their way. All the liquidity crisis caused a lot of
damage to Dabba Traders.

How did the dabba traders settle their trades in demonetization phase?

Settlements could not be reached, most were trying to figure if gold or other such
instruments would be a better option for settlement. Circulation of new notes was
eagerly awaited and till then most are converting their cash to gold.

Do you think that people will quit Dabba Trading and shift to the regulated
market?

People had already started moving away from dabba Trading in November and
December many have shifted their accounts to discount brokers like
Zerodha,5paisa.com, Indian Trading League etc. All illegal practices in equity and
commodity markets will die a natural death after the demonetisation scheme. There
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is no scope for cash-related settlement anymore. People would quit Dabba Tarding
if they fear that another event like this might arise. Fear that Mr. Narendra Modi
has created in the minds of people will last for a long time. In case, liquidity
increases and no strict action is seen in due course against cash withdrawals and
deposits then traders might prefer Dabba Trading once again.

Post Demonetisation phase how is Dabba Trading still working?

Dabba Trading after Demonetisation has decreased a lot and there are very less
chances that it recovers until the liquidity increases. There is reluctance among
both clients and (dabba) brokers to transact in Rs 2000 notes owing to a fear that
these notes too may be recalled. But many Dabba Traders are still working
normally as if demonetization for them never really happened without any fear.

What is the Expected impact of demonetization on dabba trading?

Impact of Demonetization on Dabba Trading is still unknown as many traders are

still working, the impact may come soon after the government passes GST bill and
other laws like reduction in the limits of Cash withdrawals from the banks.

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 Chapter Five

OBSERVATIONS AND CONCLUSION

OBSERVATIONS-

According to the observations made while making the project, People opt for
Dabba Trading because of many reasons that are as follows-

 Less Paper work – Minimum paper work is required in dabba trading where as
there are many documents required while trading in regulated markets.

 Avoid Taxes- HNI’s could prefer Dabba over the regulated one to save taxes. As
government levies many taxes on a single transaction such as
SecuritiesTransaction Tax, Capital Gains Tax etc.

 No KYC- No KYC is required in Dabba Trading. Without any verification a trader

can trade in market.

 No Margin Payments- After 2011 SEBI has made strict laws to maintain margins
while trading in Commodities market and FNO market. Dabba Trading requires no
Margin or a nominal margin depends upon trader’s relation with the Broker

 Weekly Settlements- Transactions in Dabba markets are cash settled on weekly

basis.

 Only Cash Transactions- Dabba trading is where black money can be invested
into the stock markets. People hiding Black money from the government prefer
Dabba over regulated

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 It is also observed that SEBI should create more awareness amongst the investors
and make strict norms to take action against such fraudulent activites.

 Observations show that people have shifted away from Dabba trading post
Demonetisation and discount brokers have benefitted a lot from this.

 Imapact of Demonetisation was seen on many sectors and Dabba Trading was one
sector which had a major impact.

 Observations also show that Dabba Trading proved out to be very positive for
Indian Stock Markets as there has been a visible surge.

 SEBI merger with FMC will help to abolish Dabba Trading.

CONCLUSION

India’s demonetization move was apparently mismanaged in the beginning; the

effects at micro level look advantageous. For instance, all sorts of illegal activities,
like terrorist financing, etc. have been completely hit after the announcement. The
demonetization process has also repaired India's counterfeiting problem for the
near to mid-term. The cash-centric black market for the most part ceased to
function with the nullification of the bulk of its currency. It has also been reported
that the new 500 and 2,000 rupee notes are less vulnerable to counterfeiting,
having advanced security features. It is also thought that the drive will wipe out a
measure of corruption and tax evasion from parallel Stock Markets and will help
boost Indian Stock Markets. An unintended positive of the demonetisation
drive has been the sharp drop in trades in the illegal 'dabba' market over the
last couple of months. Dabba trades have been hit hard by the currency
shortage in the system, as all the trades are settled in cash.

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BIBLIOGRAPHY

Newspapers-

The Economic Times

The Times of India

The Indian Express

DNA

Websites-

http://www.moneycontrol.com/news/business/markets-business/market-for-dabba-
trade-yet-to-recoverdemonetization-blow-940345.html
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demonetisation-scheme-may-kill-dabba-trading/articleshow/55344053.cms
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traders-shift-to-organised-trading-platforms-117030600468_1.html
http://www.thehindu.com/business/markets/sebi-merger-sounds-death-knell-for-
dabba-market/article6948445.ece
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sebi-rules-1715727
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mechanics.html

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