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 ($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.
Commodity derivatives worth $265.54 billion were traded on India's exchanges in the first six months of the year, less than a third of the volumes two years ago before a new transaction tax was introduced. Market participants and traders estimate a bulk of the those trades has moved to the dabba markets.
Officials at the Securities and Exchange Board of India (SEBI) say they are worried about contagion if markets turn volatile, particularly if dabba traders are using both on-market and off-market trades to hedge their exposures.
Though there is rarely proof, brokers say they sometimes see instances of dabba causing unusual market moves. In early 2013, brokers attributed a sell-off in mid and small-cap stocks over several days in part to a major Calcutta investor liquidating actual shareholdings after losing heavily in the dabba market.
"There is a significant risk of spillover in the financial system," said a senior regulator at SEBI.
SEBI, which will be overseeing commodities after a planned merger with the Forward Markets Commission, has set up a three-member team to revise its dabba policy, SEBI officials said.
The regulator said in a statement to Reuters that it was also working with state police and had set up 16 regional offices, given the proportion of trades happening outside India's main financial hubs, in regions like Gujarat.
Modeled after the "bucket shops" prevalent in the United States a century ago, dabba trading -- after the Hindi word for "box" -- sprung up after India opened its markets in the 1990s, mainly as a way to avoid high taxes.
Although India has been steadily cutting the securities transaction tax for equities, other taxes have made trading more expensive for ordinary investors. These include taxes on short-term capital gains and a business tax.
Dabba trades also allow investors to avoid SEBI registration requirements or the margin requirements set by exchanges.
In a typical dabba trade, an investor places an order with a broker, who logs the trade but does not usually buy the actual security. As a result, it is a straight bet on a capital gain, without any hope of dividend income.
When the investor cashes out, the broker would need to pay back the profit should that security have appreciated, or receive money should it be a losing bet.
The ease of dabba trade has made it particularly difficult to root out, even though Indian laws stipulate stringent penalties of up to 10 years imprisonment as well as fines of up to 250 million rupees ($3.94 million).
Indian households own only about $400 billion in equities, compared with $1.1 trillion in bank fixed deposits and $1 trillion in gold, according to Morgan Stanley. But brokers say squeezed clients mean they are losing out regardless.
"Most of my clients are shifting to dabba," said Nishant Jain, a broker in the state of Rajasthan.
"They don't want to trade officially because of the disadvantages."