Should I investigate the recent stock market volatility? | Commentary

The story so far: India’s stock market experienced extreme volatility immediately after the release of exit poll results earlier this month and again after the results of India’s most recent Lok Sabha elections were announced on June 4. Benchmark indices Nifty and Sensex have since recovered their losses. The Indian National Congress has alleged that Prime Minister Narendra Modi and Home Minister Amit Shah have manipulated the stock market by making statements in favour of certain investors.

What is the controversy about?

On June 3, the Nifty and Sensex rose 3.2% and 3.4%, respectively, to record highs on the first day of trading after exit poll results released last weekend projected the BJP to win a landslide majority in the elections. The biggest gainers were shares of companies seen as close to the government, such as Adani Group shares, and public sector companies that were expected to benefit from Modi’s third term in power. However, both benchmark indices fell nearly 6% the day after the actual results did not match the exit poll predictions. The June 4 fall was the largest single-day drop in the stock market since March 2020 following the outbreak of the COVID-19 pandemic in India, wiping out investor assets worth about Rs 30 billion. Ahead of the release of the exit poll results, the Prime Minister and the Home Minister had made statements encouraging investors to buy shares before June 4 to take advantage of the election results.

What is the opposition’s argument?

The Indian National Congress Party alleges that Modi and Shah’s comments intentionally encouraging retail investors to buy stocks before the election results were announced were an attempt to manipulate the market in favor of certain foreign investors. To support this claim, the party’s data head Pravin Chakravarti noted that the value of shares traded in cash in the market doubled on May 31, the last trading day before the exit poll results were released. Total stock trading on May 31 was Rs 2.3 trillion compared to Rs 1.1 trillion the previous day. Chakravarti said that more than half of the buying on May 31 was by foreign investors, adding that foreign investors were largely net sellers before May 31 but suddenly became net buyers of stocks. He said that the prime minister’s comments urging investors to buy stocks before June 4 should have benefited foreign investors who had piled into shares before the exit poll results, leading to a 3% surge in the stock market on Monday. The opposition party alleges that these foreign investors had inside information about the exit poll results. They added that foreign investors sold their shares on Monday to retail investors who were not only late to the party but also suffered huge losses on Tuesday. The opposition parties have called for the formation of a Joint Parliamentary Committee (JPC) to look into the issue.

What do the market regulator’s rules say?

The Securities and Exchange Board of India’s Prohibition of Fraudulent and Unfair Trade Practices (FUTP) rules on securities markets make it illegal to “disseminate false or misleading news likely to induce buying or selling of securities.” However, there are exceptions. Comments on the overall trend of the market broadcast to the public through mass media such as television and newspapers are not considered the same as information secretly leaked to certain investors to profit from upcoming market movements. Without such exceptions, it would be impossible for anyone to express an opinion on the market. Thus, experts argue, for example, there is probably no illegality in a statement urging investors to buy before June 4 unless an investigation proves that Prime Minister Modi was conspiring with certain investors to stimulate the market before the exit poll results.

How did the center respond?

Union Minister Piyush Goyal responded to the Opposition’s accusations by claiming that foreign investors were actually buying shares at high prices and selling at low prices, while Indian investors were taking advantage of market fluctuations to sell at high prices and buy at low prices. NSE data seems to support this claim, with the umbrella category of ‘retail investors’ net selling shares on May 31 and June 3 when the market was up and net buying shares worth Rs 21,179 crore on June 4 when the market crashed. Foreign Portfolio Investors (FPIs), on the other hand, were net buyers on May 31 and June 3 when the market was up and net sellers on the day when the market crashed. However, some market experts point out that the NSE’s ‘retail investors’ category includes not only small and ordinary individual investors but also Non-Resident Indians (NRIs), HUFs, individuals/personal firms, partnership firms/limited liability partnerships (LLPs), which encompasses investment vehicles used by ultra-high net worth individuals and high net worth individuals. These experts point out that “retail investors” from FPIs and domestic mutual funds have purchased shares worth a net amount of over Rs 21,000 crore, making it unlikely that such large purchases were made solely by small “retail investors”.

Moreover, FPIs bought shares worth Rs 96,155 crore on May 31, a record high, but sold shares worth Rs 93,977 crore on the same day. In other words, despite the surge in trading activity, foreign investors did not net buy shares on May 31 in large quantities. However, this is not to categorically assert that there was no nefarious activity on that day. The net purchase or sale data may not reflect how individual foreign investors with insider information profited. Moreover, whether an investor group made profits or losses also depends on when they were able to buy or sell shares during the trading session, regardless of whether the index closed up or down on that day. Only a thorough investigation based on detailed data can give the answer as to whether there was manipulation or not.