Exactly a week after the joint raids by the Securities and Exchange Board of India (Sebi) and the National Stock Exchange (NSE) on a big-time dabba operator, even those who ought to know what this business is about seem clueless.
What is dabba trading? Does the fact that this market has a trading turnover in excess of Rs 2,000 crore a day give it a semblance of legitimacy, on the claim that it offers carry-forward and leverage facilities to small operators? Or, is it just an illegal market whose activities influence and distort stock prices on the official bourses? Its very name reeks of high risk and illegality—but the Sebi-NSE team have discovered that the skilful use of technology has turned it into a very sophisticated operation capable of causing serious price distortions and volatility in the capital market. As it turns out, Pradeep Kumar Bansal, who was the target of the Sebi-NSE operation, was a fairly big fish in the dabba trade. He operates from a non-descript address at Byculla in central Mumbai, but his office, packed with sophisticated equipment and gadgetry, acts as the hub for his nationwide operations.
His firm, Bansal Sharevest Securities Pvt Ltd has multiple trading memberships on Indian stock exchanges including: the National Stock Exchange (derivatives segment), the Interconnected Stock Exchange of India and the Calcutta Stock Exchange. He is also a sub-broker to his own broking firm, earning commissions on its deals. (Sebi has now banned promoters/directors from acting as sub-brokers to their own brokerage firm after a separate investigation).
Why would an operator in the illegal market require multiple stock exchange memberships? Precisely in order to structure his dabba trades correctly. Knowledgeable sources say that dabba Trades are a variation of the American bucket shop operations of the 1920s, which were known to have mafia links. The difference is that the trades are now backed by sophisticated software and have a direct link with the official bourse in order to ensure precision in accounting and prices. What usually happens is that an investor wanting to buy 100 shares of say stock X, will have a one-share transaction on the official bourse while the remaining 99 will be written in the cash sauda (transaction) book.
The multiple stock exchange memberships allow operators like Bansal to log that single trade on the official exchange creating an appearance of authenticity. A significant similarity with the bucket shops is that dabba operators also avoid investors who are extremely successful traders. Such winners are given a quick brush off because they have the uncomfortable knack of developing a following that could break the casino-like bank of the dabba-operator. Coming to the action against Bansal, it was planned and executed in just over a week. On instructions from the chairman to investigate these trades, the Sebi team identified Pradeep Bansal as one of the biggest dabba operators. A search through Sebi’s internal records revealed his operations at multiple locations and a raid was plotted at his offices in Mathura, Bhuj, Kolkata, Bangalore and Mumbai. Although Sebi officials are still sifting through mountains of data, the initial findings already indicate a significant breakthrough. For starters, the very appearance of Sebi-NSE officials created such panic among Bansal’s employees that in one place, they simply left the offices and ran away. At another office, the employees tried to throw the sauda books out of the window to escape detection. The officials scrutinised all single entry trades in the official records and looked for a corresponding bigger transactions in the hand written sauda book and found enough evidence of a flourishing dabba racket.
Crucial information came from the Bangalore investigation team. It hit upon information that a specific computer in Bansal’s Kolkata office had a directory named ‘NSE demo’. The information was passed on to the Kolkata team and the file was discovered. It contained a highly sophisticated software that allowed Bansal to keep tabs on all his offices, most of which were run by his own relatives. What Bansal was doing, in fact, amounted to running a fully automated, parallel, and completely illegal, nation-wide stock exchange without any margins and restrictions. Sebi officials have bagged information about the software developer and a nation-wide list of dabba traders conducting similar operations as well as Bansal’s entire client list.
Further investigations at Bansal’s Mumbai office hub indicates that he gathered information on his nation-wide turnover by afternoon each day and worked out his net deliverable position. He then hedged this position on the NSE through derivatives’ trades, imparting safety and security to his illegal business. Bansal’s deliverable position everyday apparently runs into several hundred crore of rupees, indicating that a truly large illegal market has been flourishing unchecked. Sources say that Bansal had initially cooperated with the investigators but has now clammed up and got himself admitted to hospital claiming ill health. While Sebi has reacted with commendable speed in barring Bansal and his companies from operating the market, this may be just the tip of the iceberg. The fear that Bansal’s software would lead the way to other operators has already spread enormous panic in the illegal trade and many dabba-wallahs across the country have temporarily downed shutters. Will these illegal trades continue to flourish because the market does not allow sufficient hedging and deferral options?
Probably. But when NSE’s derivatives list expands beyond the current 41, or when it offers newer derivative products for trading, then some investors are certainly bound to switch from the dabba market to the legitimate one.
But it would be much too optimistic to hope that Sebi can root out all illegal trading activity by using the critical information collected from Bansal’s offices. So long as there is large amounts of black money sloshing around in the economy and the political class encourages large scale loot of the system, there will always be a dabba market, with operators finding ingenious ways to camouflage their activities. Sebi can only remain vigilant and keep striking at illegal trades whenever they are detected. -- Sucheta Dalal