The inside story of Sebi crackdown on dabba trading

Byculla, a south Mumbai neighbourhood, is known for its crowded and narrow lanes filled with honking cars fighting for space, its rows and rows of vegetable sellers, delicious streetside non-vegetarian food and its non-descript, medium-sized residential and commercial buildings.

One morning in July 2003, a group of four or five men struggled their way through the Byculla chaos to reach an old, worn-out, shabbily painted, medium-sized building. They forced themselves inside the building and entered the door bearing the name plate Bansal Sharevest Securities Pvt. Ltd.

Once these men revealed their identities as Securities and Exchange Board of India (Sebi) officers, there was commotion inside the office. Some people tried to escape through the back door, some threw documents outside the window, some simply sat at their desks in fear, and some rushed to making distress calls. The Sebi officers managed to calm them down and began their work of search and seizure of the premises.

The interior of the office, with its sophisticated equipment and gadgets, was an antithesis of the dilapidated exterior of the building that housed the office. The other offices of Bansal Sharevest in Bhuj, Kolkata, Mathura and Bengaluru were also simultaneously raided by Sebi officers. This was the first-ever raid conducted by Sebi. It was only a few months back, in December 2002, that Sebi had been given the authority to conduct search and seizure. What prompted Sebi to use this power within six months itself was the growing menace of ‘dabba traders’.

This is how a usual share purchase in the share market looked like: An investor wanting to buy shares for, say ₹100, would instruct his broker to execute the purchase on his behalf. The broker would either take the amount of ₹100 upfront from the investor or, if he has sufficient margin money from the investor with him, would purchase shares for ₹100 on the investor’s behalf from the exchange by paying that amount himself. Each trade involved some cost to the investor; a percentage of the transaction amount had to be paid as broker fee, exchange fee, Sebi turnover fee, stamp duty and, from October 2004 onwards, a percentage of the transaction amount would go to the income tax department as Securities Transaction Tax too.

As it stood then, for a transaction amount of ₹100, the total cost would amount to about ₹101, the fees and other payments amounting to about 1 per cent of the transaction amount. This would be paid by the investor to his broker (even if the amount of ₹100 was not paid upfront, some amount had to be kept by the investor with the broker as margin money).

A similar cost would be incurred when the investor decided to sell his shares. The sale/purchase transactions would be recorded on a system, with proper trails and paper documentation. Obviously, settlement of a trade in the stock market is guaranteed, and even if one of the parties defaults, the buyer would invariably get his shares and the seller his money.