IPO Grey Market: The Unofficial Indicator

IPO Grey Market is an informal and unofficial market in which IPO shares are traded prior to their formal listing on the stock exchanges. It is outside the regulatory framework, but it is closely tracked because it provides investors with a perception of the demand and sentiment of the IPO.

1. Grey Market Premium (GMP)

• GMP stands for the additional amount investors pay for IPO stocks in the grey market above and beyond the issue price.
• Illustration: If the IPO issue price is ₹850 and GMP is ₹300, then the overall grey market price will be ₹1,150.
• GMP Prediction: It predicts the listing price of an IPO. But the actual listing price may be other than that.

2. Kostak Rate

• The Kostak Rate is the amount at which the whole IPO application (including multiple lots) is traded in the grey market, whether allotment takes place or not.
• Illustration: If the IPO application involves 15 shares for ₹7,500, the purchaser may offer to pay extra ₹1,000 for the whole application for a total transaction of ₹8,500.

3. Subject to Sauda

• This is an extension of the Kostak Rate, in which the buyer undertakes to pay a fixed premium only if the allotment of the IPO is received by the seller.
• Example: If allotment is received by the seller, the buyer will pay the agreed premium (e.g., ₹4,000). If the seller fails to receive the allotment, the transaction is cancelled.

• Unofficial: There is no official body or regulation governing transactions.
• Transaction Mode: Trades normally happen over telephone calls or internet forums, with settlement typically in cash.
• Trust-based: The grey market is based on trust among buyers, sellers, and dealers.
• Market Availability: Available from the date of the IPO announcement to the previous day of the listing, with settlement on the date of listing.
• Risk: As the market is not regulated, it entails high risk, with no legal contracts or remedy in case of defaults.

1. Positive GMP (Profit Scenario)

• IPO Issue Price: ₹500
• GMP: ₹300
• Expected Listing Price: ₹800
• If the listing occurs at ₹1,200:
• Seller Profit: ₹4,500
• Buyer Profit: ₹6,000

2. Negative GMP (Loss Scenario)

• IPO Issue Price: ₹500
• GMP: -₹200
• Expected Listing Price: ₹300
• If the listing occurs at ₹600:
• Seller Profit: ₹4,500
• Buyer Loss: ₹3,000

Note: Rs 7,500 is the amount for 15 shares bought at Rs 500. Rs 4000 is the premium buyer paid for the entire application.

IPO Grey Market Premium Vs Kostak

Grey Market Premium vs Listing price

Pros of Grey Market Trading

• Profit Potential: Grey Market trading enhances the opportunity of earning a profit on IPO shares through trading before they are listed on stock exchanges.
• Pre-Listing Trading: Investors have the option to trade IPO shares even prior to listing or before the subscription period ends.

Drawbacks of Grey Market Trading

• High Risk: Because the market is not regulated, there is high risk of loss, and investors are vulnerable to fraud or error with no official redress.
• No Grievance Redressal: If any fraud or transaction issue is involved, there is no court of law where the matter can be resolved.

Is Grey Market Premium (GMP) Good or Bad?

• Indicator of Market Sentiment: GMP assists in measuring the demand and sentiment for the IPO.
• Not Always Accurate: Even though GMP gives useful information, it is not always 100% accurate.

• Angadias play a significant part in the grey market. They are the conventional intermediaries who conduct cash transfers, which are mostly employed to transfer precious items such as jewelry and cash.
• They are the unofficial couriers who pick up and drop off payments and offer door-to-door services in the grey market.
• Risk Factor: Angadias' role introduces one more risk factor, as the transactions are significantly based on trust.

In conclusion, Grey Market Trading presents both opportunities and danger. It is a useful guide to forecasting IPO performance, but it must be used with care.