The brokerage platform is the counterparty to trades punched by the customer. This means that any money lost by the customer is equal to the profit of the platforms. In addition, they also offer leverage up to 1,000 times, which means customers are bound to lose a lot of money over time. A small price move is enough to wipe out the entire account balance.
These platforms allow trading in currencies, international stock indices, and commodities, but the orders are not routed through the exchanges.
The platforms are heavily advertised on YouTube, using all the tricks of the digital trade such as referrals, testimonials, affiliate programs, and sponsored posts.
They flaunt dubious global awards, claim membership of shady self-regulatory bodies, offer inducements such as ‘free margin with bonus’, fancy cars for super traders, and ease of making profits to entice and ensnare customers.
Foreign exchange trading is regulated by the Reserve Bank of India, which prohibits trading with a foreign broker, using a foreign bank account, and trading in anything other than four currency pairs with the rupee:
The dollar, euro, yen, and pound.
Many unregulated trading platforms are also thriving under the nose of our two financial regulators. Trading can be done only through an Indian broker based and licensed in India.
It is illegal to use an online portal to carry out transactions offshore.
These online portals are not members of the Indian exchanges where forex trading takes place or registered as intermediaries with the Securities and Exchange Board of India, which regulates such exchanges.
Clients place a margin (between 0.1 % and 1 % of the trade value) to enter positions that are marked to market daily and don’t have an expiry date.
“Since these platforms offer derivatives trading on currencies and international securities and have Indian bank accounts where they collect funds, they are essentially operating illegal brokerage and exchange platforms and advertising them openly.
Why are RBI and SEBI silent on illegal digital DABBA TRADING?
Neither SEBI nor the RBI has stirred itself to ban these platforms, which are nothing but digital dabba trading platforms.
Many of them now accept funds via RTGS and NEFT, meaning that they have set up Indian entities as well. This mode of payment seems to violate the RBI’s rules because trading in foreign exchange other than the four pairs mentioned above is not permitted.
The RBI can easily shut them down if it has noticed them.
SEBI too can act since the platforms illegally permit trading in international stock indices and commodities.
They also offer to trade in CFDs or contracts for difference, which is an agreement to pay or receive the difference in the opening and closing price of a financial product, without buying the product. A CFD trader never owns the underlying asset.
CFDs are illegal in India. A particular type of CFD is called binary options, where the payout depends entirely on the outcome of a yes/no proposition such as whether the price of a particular asset that underlies the binary option will rise above or fall below a specified amount.
All this is illegal. SEBI is even fully aware of what is going on but has done nothing despite its draconian powers of search and seizure.
The scale of operations of digital dabbas in India is now huge, given their big advertising spends and sponsorships.