Praveen Chakravarty, who is the chairman of Professionals’ Congress and data analytics of the Congress party, recently wrote a piece in the Deccan Herald, titled The world’s first ‘Exit Poll Stock Market Scam’. 

In this piece, Chakravarty writes that on May 31, which was a Friday, the foreign institutional investors (FIIs) bought 58 percent of all the shares bought on that day. He goes on to write that this was surprising given that they weren’t buying much before that and were net sellers (dear reader, just keep this term in mind, I will explain it as we go along). 

Chakravarty then terms this share-buying by the FIIs as “mysterious” and says that it “can only be explained by what happened the next day”. So, what happened on the next day? The next day was June 1, Saturday, on which the seventh and the last phase of the 18th Lok Sabha elections were carried out. 

As soon as the elections ended on that day, TV channels put out the results of the exit polls they had commissioned. Almost all such exit polls gave the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) more than a substantial majority in the Lok Sabha. Some even said that the BJP-led alliance would get more than 400 seats in the lower house.

So, the exit poll results were music to the ears of stock market investors who have been in love with the idea of the Narendra Modi-led BJP and the BJP-led NDA returning for a third term. It was their wet dream. Or as Chakravarty put it: “When the stock market reopened on June 3, after the weekend, it rose to an all-time high, driven by the exit polls’ prediction of a third term for Modi with an untrammeled majority.” 

On June 3, Monday, the BSE Sensex – India’s most popular stock market index – rose to an all-time high of 76,649 points – a jump of 3.4 percent or 2,507 points from its close on Friday, with the market remaining closed over the weekend. Now, given that the foreign investors had bought a massive amount of stocks on Friday, they were sitting on huge profits on Monday, after stock prices rallied big time.

As things turned out, the exit polls were way off the mark. Once the counting started on June 4, Tuesday, and the broader trend was clear – that the BJP-led NDA would not even cross 300 seats – the stock market adjusted for this eventuality and crashed. The BSE Sensex fell to 72,079 points or by 5.7 percent from Monday’s close. 

Chakravarthy goes on to say that the stock market “lost Rs 30 lakh crore in value just on counting day, the highest fall ever in its history,” and “by which time, the foreign investors had sold their shares and made massive profits.” 

The argument that Chakravarthy is making is fairly straightforward. Foreign investors knew the exit poll results in advance and indulged in insider trading – that is profited from information which most other stock market investors did not have access to, but the FIIs did. As Chakravarthy asks: “Did they [FIIs] act on material, non-public, inside information of the exit polls to profit from them?” 

Inside information is a term which refers to a situation where only a set of investors has access to some information materially important for stock prices and they trade on it. The broader market doesn’t have access to this information.

But does the detailed reading of FII buying and selling data really tell us all that Chakravarthy wants us to believe? Or what it is telling us is much more nuanced than just this? Let’s take a look.

1. The FIIs bought stocks worth Rs 96,155 crore on May 31. The Centre for Monitoring Indian Economy’s Economic Outlook, a database of economic and financial data, has data on daily FII buying of stocks going as far back as January 1, 1999 – which is more than 25 years of data. The Rs 96,155 crore of purchases carried out by the FIIs on May 31 was the highest ever. So, Chakravarthy seems right when he says: “It is then intriguing that on May 31, when there was no big news development, a group of foreign investors suddenly turned bullish on India and decided to indulge in massive buying of shares.” 

2. The trouble is that this shows only one side. While the FIIs can buy stocks on a given day, they can also sell. On May 31, FIIs sold stocks worth Rs 93,977 crore, again the highest ever. Now, what does that mean? It means that FII’s net bought stocks are worth Rs 2,178 crore (Rs 96,155 crore minus Rs 93,977 crore). When the difference between what the FIIs have bought and what they have sold is positive, it is said that they have net bought stocks. On the flip side, when the difference between what they have bought and what they have sold is negative, it is said that they have net sold stocks. 

3. So, FIIs net bought stocks worth Rs 2,178 crore on May 31, which isn’t really a huge amount of buying. In fact, if we look at the net data from January 1, 1999 onwards, there were 301 occasions when the net bought figure of FIIs was greater than Rs 2,178 crore. So, does this mean that Chakravarty was cherry-picking data to make the point he wanted to make? 

4. While some cherry-picking did happen, a simpler explanation perhaps seems to be that in the need to address a larger audience – like anyone associated with a political party would want – and make things simple, Chakravarty has ended up making things simplistic (if you know the difference). So, what do these data points really tell us? 

5. The fact remains that on May 31, foreign investors bought stocks worth Rs 96,155 crore, the highest ever. The average buying in six trading sessions before that stood at Rs 19,305 crore. Clearly, something was happening on May 31. Now, does this mean that a set of FIIs had access to the exit poll results a day before they were published? Was there insider trading happening? While the data can hint towards that, it cannot establish that with total certainty. 

6. At the same time, the foreign investors also sold stocks worth Rs 93,977 crore on May 31, the highest ever. In the six trading sessions before May 31, they sold stocks worth Rs 18,913 crore. Now, what does this mean? Did one set of FIIs not buy the prevailing political narrative hard sold by the Noida-based Godi Media and the Delhi-based national media? Did they not fall for Abki baar 400 paar? 

Or, if I may put out a slightly speculative theory out there, did the exit pollsters carry out one set of exit polls for TV channels that were regime-friendly, and another set for some of the FIIs? And did the second set of exit polls for some of the FIIs come to a different conclusion than the ones carried out for TV channels? As The Economic Times wrote on June 11: “Foreign funds commissioned their own surveys to gauge the public mood… But the plot thickens from here on because, reportedly, some of the very same pollsters who presented a super optimistic picture in TV channels had carried out these separate surveys for foreign funds.” Again, the data can only hint towards things and not establish them with total certainty. 

7. Another explanation has been offered for the huge jump in the buying and selling of FIIs on May 31, and that’s the rejigging of the MSCI indices. Any index is essentially a constitution of stocks, like the BSE Sensex is made up of 30 stocks. Instead of actively choosing which stocks to invest in, investors can simply choose to invest in the stocks that make up the Sensex (or any other index for that matter). In fact, there are mutual funds and other financial institutions that facilitate such investments and are referred to as index funds. When index funds are listed on a stock exchange, and can be bought and sold like stocks, they are referred to as exchange traded funds (ETFs). Now, many ETFs run by foreign investors invest in indices published by the MSCI – an American company in the business of making indices that help investors invest. So, instead of actively choosing which stocks to invest in, foreign investors can simply invest in stocks that make up an MSCI index.

Now, MSCI keeps changing the constituents of its indices – so some stocks are left out and some stocks are added. On May 31, one such rejig came into effect in the Indian case. To take this change into account, FIIs running ETFs would have had to sell out of stocks that were left out and buy the stocks that were added. But even after taking this possibility into account, the buying and selling of FIIs was way too high. As a news report in Bloomberg published on May 14 pointed out: “India’s stocks are poised to see about $2 billion of passive inflows after a review of MSCI Inc.’s gauges.” That works out to less than Rs 17,000 crore.

8. So, where does that leave us? Well, as ACP Pradyuman often used to say in the TV series CID: “kuch to gadbad hai daya.” There is only so much that broader aggregate level data can tell us. And in this case, it raises important questions, without providing exact answers. Which is why it is important that the stock market regulator, the Securities and Exchange Board of India (SEBI), release detailed data at individual foreign investor level, what they bought and what they sold. If that is not possible for reasons of confidentiality or other reasons then detailed aggregate level data on stocks bought and sold by foreign investors on May 31 should be published. This will help in taking the MSCI rejig into account and establishing if there was more to this than just that. 

9. While this might be the right thing to do, SEBI releasing detailed data will end up embarrassing the newly-elected government. And given that it’s not going to happen. So, the opposition parties need to continue vociferously demanding the constitution of a Joint Parliamentary Committee to investigate this matter. Of course, even that’s not going to happen. The more things change, the more they remain the same. 

Vivek Kaul is the author of Bad Money. 

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