Many suspicions have been floating around about who had certain information about the election results and made money on the stock market. Various allegations are floating around, but when you look at both the buying and selling data, an interesting story emerges with various conclusions. There are clear indications of coordinated trading based on certain information, but the culprit may be different from what we are hearing and will require deeper investigation to unravel.
So let’s see how things unfolded. On Saturday, June 1, all TV channels started airing exit polls predicting a landslide victory for the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA). Some predicted the BJP-led coalition would win close to 400 seats or even more. Investors have high praise for the Narendra Modi-led government, and expectations of a landslide BJP victory sent the market opening 3% higher on Monday and sustaining that level throughout the day. It closed 3.4% higher than Friday.
However, the exit polls were deceptive. The actual results showed the BJP finishing with a dismal 240 seats, well short of a simple majority and forcing it to rely on parties other than the NDA to form a government. As the results became clear, the benchmark Nifty index fell by nearly 9% in a shock sell-off. This sharp drop in prices was accompanied by huge trading volumes.
The sudden fluctuations in stock prices attracted political attention because the prime minister and home minister had earlier urged investors to buy stocks. The BJP claimed there was fraud, that the exit poll results that predicted a landslide victory for the BJP were manipulated, and demanded a Joint Parliamentary Committee (JPC) investigation. Congress leader Rahul Gandhi held a press conference to claim that the stock price fluctuations had made money for dodgy foreign investors and caused Indian investors to lose trillions of rupees.
Pravin Chakravarti, president of the Professionals Conference and head of data analytics at the Indian National Congress Party, wrote in the Deccan Herald: The world’s first “exit poll stock market fraud”BJP spokesman Piyush Goyal denied the allegations and argued that Indian investors had actually profited after the exit polls as they sold shares to foreigners at inflated prices.
Since then, many analysts have analysed the data available on the National Stock Exchange (NSE) on trades made by different types of investors. They have all drawn their own conclusions about which party was right. But what does the data actually tell us?
NSE provides turnover data for investor categories such as banks, insurance companies, mutual funds (MFs), alternative investment funds (AIFs), portfolio management services, foreign portfolio investors (FPIs), retail and others.
The retail segment is defined as Hindu Undivided Families (HUFs), Sole Proprietorship Firms, Non-Resident Individuals, Partnership Firms/ Limited Liability Partnerships (LLPs). Others include public and private companies/entities, trusts/associations, domestic financial institutions (other than banking and insurance), statutory bodies, New Pension Schemes (NPS), Non-Government Organisations, Depository Receipts, Non-Banking Financial Companies (NBFCs), domestic venture capital funds and proprietary trading.
Currently, the largest players in the Indian market are domestic MFs, FPIs, retail and ‘others.’ Looking at the data for these four categories from the day before the exit polls to the day after the election results, an interesting trend emerges that is not being discussed by commentators.
The chart below compares the average buying and selling and net data for the whole of May with that for May 31, June 3 and June 4. Those alleging fraud, including Chakravarti, point to the huge amount of buying by FPIs on the 31st (Rs 95,549.53 crore), which was 447% higher than the average daily buying, based on the assumption that the exit poll results would be in the BJP’s favour.
But looking at only one side of the data is meaningless. One has to look at the selling data of all investors and draw conclusions based on the net amount. Looking at the ‘sell’ data in the graph below, it is clear that FPIs were also big net sellers on the day (Rs 94,008.84 crore). In fact, their sales were 338% higher than the May average.
The end result? Their total net purchases on May 31st were just Rs 15.4 crore. If this was their position based on inside information, then they made very little money on June 3rd. The following chart shows the new net positions taken by the four major investor categories on May 31st. MFs were net buyers almost at the same amount as their average purchases in May. FPIs were slightly positive and retail investors were generally negative. No single investor category added significantly to their positions on the 31st and all their buying and selling was at the same level as the average May transactions.
What happened on June 3rd when the effects of the exit polls hit the market? The market opened high and stayed high. It is unlikely that anyone bought low that day. Most stocks opened with big gains. So the question is, how did the major market participants behave? Whose actions indicated they knew about the fake exit poll numbers?
Surprisingly, it was not the FPIs but the so-called retail sector. Mutual funds net purchases were slightly higher than the May average, while ‘Others’ followed the same pattern as in May. In fact, FPIs jumped in and became huge net buyers. Who sold shares to them? It was the ‘retail’ sector.
But before you conclude that retail investors are super smart, remember that while MFs and FPIs are a fairly homogenous category, very little is known about the exact composition of retail investors. They are not just retail investors, your average small investor, as is commonly believed. This category includes HUFs and NRIs. If anyone knew about the exit polls, it was surely someone from these subcategories, which would have included a large number of deep-pocketed large investors.
On Tuesday, as disastrous election results for the BJP started coming in, another drama unfolded. Mutual funds were net sellers of Rs 6,249.12, FPIs were net sellers of Rs 12,511.07 and ‘others’ sold Rs 2,432.15. Who bought and sold shares worth Rs 21,192 crore from them as the market initially crashed by 9 per cent before recovering to close down 5.7 per cent? Again it was the ‘retail’ sector which was a net buyer of Rs 21,178.94. ‘Retail’ investors had outdone institutions for the second day in a row. Was it a fluke?
Retail investor activity has since returned to normal levels. For example, on June 11, a week after the earnings release, they made a net purchase of just Rs 8 billion. This sudden surge in activity raises the question: who were the “retail” investors who made such huge profits in just two days and then seemingly disappeared?
No, foreigners are not making money. They are losing money. The real gainers are a few big investors hiding under the label of “individuals” – a broad category that includes non-resident Indians, but is much easier for regulators to scrutinize.
Who are these people who knew about the exit polls and who are supposed to have made billions this time? The opposition leaders who are demanding an investigation certainly have a point. It remains to be seen whether the Securities and Exchange Board of India (SEBI) will get to the bottom of the election fraud.
