Should we investigate recent stock market volatility? | Explain

Congressman Rahul Gandhi shows a graph of stock market movements during a press conference in New Delhi on June 6, 2024. | Photo credit: AP

The story so far: The Indian stock market witnessed extreme volatility immediately after the release of exit poll results earlier this month and on June 4, when the results of the last Lok Sabha elections were declared. The benchmark indices, the Nifty and the Sensex, have since managed to recover the losses. The Congress has alleged that Prime Minister Narendra Modi and Home Minister Amit Shah manipulated the stock market through their statements to favor certain investors.

What is the controversy about?

The Nifty and Sensex gained 3.2% and 3.4% respectively to hit all-time highs on June 3, the first day of trading after poll results, released the previous weekend, suggested the BJP would win a overwhelming majority in the elections. The biggest winners were stocks of companies seen as close to the government, such as shares of the Adani Group, and shares of public sector companies that stand to benefit from Mr Modi's third term in power. However, both benchmarks fell nearly 6% the next day as actual results failed to match exit poll predictions. The June 4 decline, which was the worst single-day fall in the stock market since March 2020 following the COVID-19 pandemic outbreak in India, wiped out investors' wealth worth around 30 lakh. Before the election results, the Prime Minister and the Interior Minister made statements encouraging investors to buy stocks before June 4 in order to benefit from the election results.

What is the opposition's allegation?

The Congress alleged that Mr. Modi and Mr. Shah had deliberately made comments urging retail investors to buy stocks before election results day and that this was an attempt to manipulate the market to favor certain foreign investors. To support this claim, the head of the party's data wing Praveen Chakravarthy drew attention to doubling of stock values traded for cash on the market on May 31, the last trading day before exit poll results are released. The total value of shares traded on May 31 was 2.3 lakh crore compared to 1.1 lakh crore the day before. Mr. Chakravarthy noted that more than half of the purchases made on May 31 came from foreign investors and added that foreign investors were largely net sellers before May 31, when they suddenly became net buyers of 'actions. According to him, the Prime Minister's statements encouraging investors to buy shares before June 4 would have benefited these foreign investors who managed to stock up on shares before the results of the polls caused the stock market to jump by 3% Monday. Opposition parties claim these foreign investors had inside information about exit poll results. They also add that foreign investors managed to dump their shares on Monday to retail investors who were not only late to the party but also suffered huge losses on Tuesday. Opposition parties have demanded the establishment of a Joint Parliamentary Committee (JPC) to investigate the matter.

What do the rules of market regulators say?

The Securities and Exchange Board of India Prohibition of Fraudulent and Unfair Commercial Practices Related to Securities Market Regulation (FUTP) declare that it is illegal to disseminate false or misleading information that could induce the sale or purchase of securities. But there are exceptions. Comments on general market trend, when disseminated to the general public through media such as television and newspapers, are not considered information secretly leaked to certain investors to benefit from an upcoming move of the market. Without these exceptions, it would be impossible for anyone to express their opinion on the market. So experts say that unless, for example, an investigation can prove that Mr. Modi acted in collusion with some investors to boost the market before the poll results, there is probably nothing illegal in its statement urging investors to buy before June 4.

How did the Center react?

Union Minister Piyush Goyal responded to the opposition's accusations by saying that foreign investors were actually buying stocks at a high price and selling them at a low price, while Indian investors were adroitly using the volatility of markets to sell high and buy low. NSE data appears to support this claim, as it shows that the general category of retail investors were net sellers of stocks on May 31 and June 3, when the market rose, while they were net buyers of stocks worth 21,179 crores on June 4, when the markets rose. crushed. Foreign portfolio investors (FPIs), on the other hand, were net buyers on May 31 and June 3 when markets rose and were net sellers on the day the markets fell. Some market experts, however, point out that the retail investor category of NSEs includes not only ordinary small retail investors, but also Non-Resident Indians (NRIs), HUFs, Sole Proprietorship/Proprietary Firms and Partnership/Limited Liability Firms. Partnership (LLP) which encompass investment vehicles used by high net worth and ultra high net worth individuals. These experts observe that stocks worth over 21,000 crores net worth were purchased by retail investors from domestic FPIs and mutual funds and it was unlikely that such large purchases would have been made by small retail investors alone.

Further, while FPIs purchased stocks worth 96,155 crores on May 31, the highest ever in history, they also sold stocks worth 93,977 crores on the same day . In other words, despite the sudden increase in trading activities, foreign investors were not large net buyers of stocks as of May 31. However, this does not categorically mean that there was no malicious activity during the day. Data on net purchases or sales may not reflect how individual foreign investors with inside information may have benefited. Additionally, whether a group of investors profited or lost money may also depend on exactly when during a trading session they managed to buy or exit a stock, whether indices closed up or down that day. Only a thorough investigation based on granular data can determine whether manipulation has taken place.