New | Indian regulators, police try to stamp out ‘shadow’ market in stocks and commodities

A crack team of regulators and specially trained state police are spearheading India’s efforts to stamp out the country’s "shadow" market in shares and commodities, turning up the heat on backstreet traders who threaten the broader financial system.

So-called "dabba" trading has been a headache for regulators for years, but a government push to crack down on the black economy and clean up the Indian market for retail investors has given a fresh boost to efforts to stamp out the multi-billion-dollar parallel system, which bypasses market rules and taxes.

Though brushing off comparisons, regulators and brokers acknowledge China’s dramatic stock market rout of recent weeks has also served as a stark reminder of the risks -- even if troubles across the border were exacerbated by China’s far higher proportion of retail investment and margin lending.

"Dabba trading and any other unlawful trading practices do present a risk in the market and need to be curbed," said Nirmal Jain, chairman of domestic brokerage and financial services firm IIFL. "It’s not good for anybody."

There is no reliable estimate of the size of India’s dabba markets, but the practice is widespread and brokers estimate share volumes are likely to add up to at least several hundred million dollars daily, compared to an average of 175.25 billion rupees (US$2.76 billion) on formal exchanges.

In commodity markets, estimates put trade at multiples of legitimate business. A senior official at leading commodity bourse MCX said earlier this year that the dabba market could be eight to 10 times the regulated derivatives market.