The 2024 Lok Sabha elections in India have been momentous for many reasons. It is not just the results, which were surprising and caught people off-guard, the stock market too played “spooky” to such an extent that many experts believe it a “scam” and one that demands an investigation. However, this alleged scam has serious political ramifications as it is inextricably linked to the exit polls. To understand why, let us look at the chronology of events.
On 31 May 2024, there was a sudden spike in stock market activity. The National Stock Exchange (NSE) experienced a doubling of shares bought and sold compared to the previous day. This surge was particularly unusual as it occurred without any significant economic or political news or development. The spike was primarily driven by foreign investors, who accounted for 58% of the buying activity, contrary to their net selling trend in the prior week. On 1st June, the exit polls for the Lok Sabha elections were released. Almost all exit polls unanimously predicted a landslide victory for the BJP/NDA-alliance, with some predictions giving them as many as 400 seats. The accuracy of these exit polls raised suspicions about their integrity as there appeared some kind of unison among the pollsters that BJP was going to return with a huge majority. It was as if some “invisible hand” was guiding the exit polls to project the numbers they were spewing in favour of the BJP.
Then on 3rd June, the stock market reopened and hit an all-time high. This was supposedly driven by the optimistic exit poll predictions of a strong BJP majority. Foreign investors who had bought shares on 31 May saw significant value appreciation in their investments.
Then came the “D-day” on 4th June when the actual election results were announced. Contrary to the exit polls, the actual results showed Prime Minister Narendra Modi struggling to secure even a simple majority. The stock market crashed, losing ₹30 lakh crores in value, marking the highest fall in its history. Foreign investors had sold their shares before the crash, realizing substantial profits, while retail investors suffered significant losses.
Another aspect of this dubious boom and bust phenomenon was the significant profiteering achieved in the derivatives market. Traders who deal in derivatives can speculate on the future price movements of an asset (company stock) without having to own the asset itself. Derivatives trading can increase market volatility due to the high leverage and rapid changes in positions based on market sentiment and news. The exit polls’ inaccurate predictions induced significant volatility, benefiting derivatives investors who profited from both the market’s rise and fall.
After examining the timetable of what happened, let’s look at the financial implications of this rise and fall in the “share bazaar”. First, the market experienced huge volatility derived from speculation and not market fundamentals. The speculation was triggered by an alleged massive rigging of the exit polls to show a certain result, which was far removed from reality.
Secondly, this speculative activity allowed foreign investors who bought shares on 31 May and sold them before the crash on 4 June to make huge profits.
Thirdly, the retail investor, who typically reacts to news and follows a “herd mentality”, incurred heavy losses due to the market’s sharp decline (following the election results).
Lastly, derivatives traders benefited the most from this “induced” market volatility, profiting from both the sharp rise on 3 June and the steep fall on 4 June.
The extreme market reactions to the exit polls and subsequent election results eroded investor confidence in the stability and predictability of the Indian stock market. The events should have prompted regulatory bodies like the Securities Exchange Board of India (SEBI) to scrutinize the activities of foreign investors and the accuracy of exit polls, considering their substantial impact on market behaviour.
Another reason for the stock market turbulence to grab headlines was the direct involvement of the Prime Minister and the Home Minister of India in this controversy. It is reported that Home Minister Amit Shah said on May 13 to “buy shares before 4 June” and on May 19, Prime Minister Narendra Modi had predicted, “Stock markets will break records on June 4th”.
Rahul Gandhi of the Indian National Congress took a press conference on this issue and asked, “Why did PM Modi and Union home minister give specific investment advice to the five crore families investing in the stock market? Is it their job to give investment advice? Why were both interviews given to the same media owned by the same business group, which is also under SEBI investigation for manipulating stock? What is the connection between the BJP, the fake exit pollsters and the dubious foreign investors who invested one day before the exit polls were announced and made a huge profit at the cost of five crore salaries?
“We demand a JPC probe into this. We are convinced that this is a scam. Somebody has made thousands of crores of rupees at the cost of Indian retail investors, and the prime minister and the Union home minister have given an indication to buy. So, we demand today a joint parliamentary committee to investigate this.”
The entire exit poll-related episode in the stock exchange is a textbook case of what is known as “insider trading”. Insider trading creates an uneven playing field where insiders can profit based on information not available to the public. This undermines the principle of fairness and equal opportunity in the stock market.
Insiders with access to critical information can manipulate stock prices for personal gain, leading to artificial inflation or deflation of stock values, which can harm ordinary investors. Most countries have stringent laws against insider trading, enforced by regulatory bodies. Committing violations can lead to serious consequences, such as fines and imprisonment.
With a rejuvenated opposition, only time will tell if a JPC is constituted to check if there were any irregularities in the exit polls and the abnormal stock market activity around that period. The issue, if probed properly, has the potential to uncover one of India’s biggest financial frauds.
Mitchell Zuckoff was on point when he said, “Every swindle is driven by a desire for easy money; it’s the one thing the swindler and the swindled have in common.”