Sebi must frame policies on disclosure, conflict of interest for exit pollsters

The market swung up sharply on Monday, 3 June, on the basis of public exit poll predictions released on the evening of 1 June, a Saturday, that the BJP would win more than 300 Lok Sabha seats. 

This reinforced earlier recommendations from Bharatiya Janata Party politicians, including the finance minister, the home minister, and the prime minister, to buy stocks, hinting that the markets would rise on 4 June, when the Election Commission of India was to announce the poll results. 

Stock market recommendations by politicians could be discounted on the basis of their known interest in projecting that their political party would do well. 

However, data-based predictions by supposedly neutral exit pollsters were taken seriously by many ‘bulls’, who enthusiastically bought in the run-up to the declaration of the polls results on the basis of those projections.

On 4 June, when it became apparent that the actual voting trends were widely at variance with the exit polls, the market crashed. Market capitalization crashed by over ₹30 trillion. 

While some traders could have made a killing on both Monday and Tuesday, the bulk of market players, including many small investors, lost large sums because they bought at high prices on Monday and sold in a panic on Tuesday.

Several opposition politicians have asked for an investigation into the circumstances, including a Joint Parliamentary Committee probe, to determine if the projections released on 3 June were due to honest errors on the part of exit pollsters or deliberate market manipulation.

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While political parties conduct their own assessments, they also hire the same exit poll experts to do the number-crunching for them. So it is quite possible that there may have been a conflict of interest for organisations conducting public exit polls.

The Securities and Exchange Board of India has all the trade data at its disposal. But this is an unusual situation. If Sebi finds that parties related to the exit pollsters (or politicians) profited from market movements, it may lack legal provisions to indict anybody. Regulations may not cover the concept of manipulating stock market prices by commenting on or making political projections.

This is a grey area in the law and needs to be addressed since market volatility is always associated with political events. In the case of the Lok Sabha election, this happened on a large scale. But market volatility is associated even with key assembly elections and also with Cabinet reshuffles. And for sure, market volatility will continue to be associated with political events in the future.

Also, regardless of the honesty and neutrality of exit pollsters following the national election, wannabe scamsters now have a blueprint for market manipulation in the future by releasing fake exit polls.  

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Sebi obviously cannot ban exit polling (and that would not reduce market volatility anyway), and traders and investors have every right to interpret exit poll projections, or any other data at their disposal, and take market positions as they see fit. Nor obviously can politicians be barred from making optimistic statements about their prospects.   

That said, it is unusual, indeed unprecedented, for politicians fighting an election to directly reference the stock market and link market movements to political outcomes. 

However, if politicians choose to do so, or to trade in stocks based on their perceptions, there is already some level of public disclosure since their political affiliations are known. 

Ideally, the market regulator should try to ensure that any financial exposures are also disclosed, especially if those are at variance to the public statements. But this may be unenforceable.

Sebi, however, can insist on full disclosure of any conflict of interest on the part of exit pollsters who make public pronouncements. This is doable and must be urgently done to preserve the integrity of market regulations. 

If an exit pollster is contracted by a media organisation to make a public pronouncement and that same pollster is also working with a political party, a financial investor, or an institution with an interest in the stock market, the exit pollster should state this upfront. 

Failure to make such disclosures should incur penalties.  

Given the financial sensitivity of exit poll data, Sebi should consider applying the same or similar criteria for insider trading, or for trades made by related parties, to exit poll organisations as it does for listed entities and promoters. 

This would, at the least, help investors and traders in interpreting exit polls and taking market positions on them, and may prevent scamsters from manipulating the market through this route.