While we all talk about and see the regulated and legalized official stock market and IPO market, there is a Grey Market that operates within this market but without any regulation and legalities. Are you shocked to know about this? If yes, then wait, there is a lot more you can learn about this market and understand how this Grey Market influences the IPO process and its subscription and price of the IPO.
What is Grey Market & Grey Market Premium in IPO?
Grey Market in the IPO market means the purchase and sale of the shares which are allotted in the IPO. It is an unregulated market by SEBI, where there are no rules and regulations of investment and trading applies as per SEBI or any other organization in the country. It is free entry and exit market depending on the trust and reliability of the parties.
This market operates to get the assurance of the purchase of shares which are issued in IPO. Since the IPOs are subscribed by the applicants first and then the issuing company allots the shares based on the type of subscription. Generally, when an IPO is over-subscribed, there is pro-rata allocation of shares or shares that are allotted using lottery facilities. So, in both cases, the applicants may end up receiving no shares or shares less than what he or she subscribed for.
So, to get the shares he or she applied for, they can come to the Grey Market where the shares allotted in IPO are sold for an extra price. This market is known as Grey Market as it is not legalized in India. It is not regulated by SEBI or any other stock market regulators and organizations.
The risk of the market is borne by the investors and the traders of this market and the dealers. Since it is done informally, there are dealers involved in the process. The Grey Market is a prominent thing in the IPO process though no one talks about it as it is not official but it is operating all the time a new IPO comes up.
How does Grey Market work in India?
Grey Market operates in the country with the help of the dealers and the traders who want to purchase the shares of IPO but not sure of the allocation. The dealers help the purchaser of the share and the seller to contact. If you want to know how this IPO Grey Market works in India, then here is an instance for you.
Supposedly, you applied for an upcoming IPO. Now, there is an investor in some other city or place who also wants to buy the shares of this company and wants assurance of having the shares in IPO. But there is no assurance in the IPO market as if the IPO is over- subscribed, then he may not get any shares or get shares as per proportion.
So, he contacts a dealer of the Grey Market who further contacts you. The deal which you both agree upon is that if you are allotted shares in the IPO, then you will sell the shares to the concerned investor for Rs. 20 above the IPO price.
Now, the IPO gets opened, you receive the shares you applied for. Now you have to sell the same to the investor you dealt with via the dealer and you will receive the IPO price of the share plus Rs. 20 for each of the shares you sell to the investor.
You make a profit of Rs. 20 per share for each of the shares on the day of listing if the IPO price is lower than the cumulative price for which you sold the shares. However, if the IPO price is over-subscribed and the listing price includes a premium of more than Rs. 20, then you are at loss. In this scenario, the investor gains, as he can buy the shares at the pre- determined price.
What is GMP?
The Rs. 20 per share we mentioned in the above section for which you want to sell the shares allotted to you in the IPO to the investor is known as the Grey Market Premium. This is the price for which the shares are traded in the Grey Market. It is derived by the demand and supply for the shares in the market. GMP full form is band when it is added to the IPO price, it becomes the trading price in the great market.
It can be positive or negative depending on the price of the share on the day of listing. If the price of the share is at par or lower than this price, then the IPO GMP is positive and vice versa. If the shares issued in IPO are issued at a premium, more than the premium in the IPO Grey Market, then it is negative.
ABC Company issued shares in IPO at Rs. 500
IPO Grey Market Premium is Rs. 200
SO, the shares will be bought in the Grey Market for Rs. 700
Now, if the premium on the share on the day of the listing is Rs. 300, then GMP will be negative by Rs. 100 and vice versa.
What is this Kostak Rates in Grey Market?
When bets are placed on the application of the share allotment in the IPO itself, the Kostak rates comes in to play. Kostak Rate is the rate at which a full IPO application is bought or sold. It is done in this Grey Market without any regulation on the same. The rate depends on the allotment of the shares. Supposedly, you applied for 5 shares. You sold the application at a kostak rate of Rs. 1000 per share which is Rs. 5000 for the whole application. You got allotted 3 shares and if you can make a profit on those 3 shares over and above Rs. 5000, then you need to share the profit with the person who bought your applications.
What is meant by Subject to Sauda?
If the applications for IPO are bought with the subject to sauda condition then it will be applicable only when the shares are allotted. Otherwise, the agreement will be canceled.
Conclusion on Grey Market in IPO
Grey Market exist in all sectors but not many of us know about the same. It is a risky venture to dive in but if you do it with conviction and full-proof preparation, then it can reap great profits for you.
No IPO found
|Issuer Company||Exchange||Issue Open|
|Yes Bank Ltd FPO||BSE, NSE||Jul 15, 2020|
|Rossari Biotech Ltd IPO||BSE, NSE||Jul 13, 2020|
|Reliance Industries Ltd. (RIL) Rights Issue||BSE, NSE|
|Antony Waste Handling Cell Ltd IPO||BSE, NSE||Mar 4, 2020|
|SBI Cards and Payment Services Ltd IPO||BSE, NSE||Mar 2, 2020|
|ITI Ltd FPO||BSE, NSE||Jan 24, 2020|
|Prince Pipes and Fittings Ltd IPO||BSE, NSE||Dec 18, 2019|
|Ujjivan Small Finance Bank Ltd IPO||BSE, NSE||Dec 2, 2019|
|CSB Bank Limited IPO||BSE, NSE||Nov 22, 2019|
|IRCTC Limited IPO||BSE, NSE||Sep 30, 2019|
|Issuer Company||Exchange||Issue Open|
|Billwin Industries Ltd IPO||BSE SME|
|Nirmitee Robotics India Ltd IPO||BSE SME||Mar 31, 2020|
|DJ Mediaprint & Logistics Ltd IPO||BSE SME||Mar 26, 2020|
|Laxmi Goldorna House Ltd IPO||NSE Emerge||Mar 20, 2020|
|Cospower Engineering Ltd IPO||BSE SME||Mar 17, 2020|
|RO Jewels Ltd IPO||BSE SME||Mar 12, 2020|
|SM Auto Stamping Ltd IPO||BSE SME||Mar 3, 2020|
|ICL Organic Dairy Products Ltd IPO||BSE SME||Jan 31, 2020|
|Chandra Bhagat Pharma Ltd IPO||BSE SME||Jan 31, 2020|
|Tranway Technologies Ltd IPO||BSE SME||Jan 27, 2020|