Table of content

IPO Grey Market

Table of content

Everything about IPO Grey Market

The grey market IPO is an unofficial, over-the-counter (OTC) marketplace that is out of the purview of regulatory authorities like the SEBI and stock exchanges. Here, investors buy and sell IPO applications before the shares of the concerned company are listed on the exchanges. Since there isn’t any platform for trading, all of the transactions in the grey market are carried out in cash, on a person-to-person basis. Trading in the grey market IPO usually begins after the public issue is opened for subscription and continues till the shares are listed.

What is Grey Market Premium?

The Grey Market Premium (GMP) is the additional amount that investors are willing to pay for the shares in the grey market, over the IPO issue price. Here’s an example to help you understand the GMP.

Let’s say the issue price in an IPO is ₹380 per share. However, due to exceptional demand, buyers in the grey market are willing to pay up to ₹420 per share. The additional amount of ₹40 (₹420 - ₹380) is the Grey Market Premium that the buyers are willing to pay to acquire the company’s shares.

The GMP is a good indicator of the price that a company’s shares are likely to reach on the listing day. Let’s take the above example. Since buyers are willing to pay a premium of ₹40 per share, it is fair to assume that the stock price may see near about ₹420 per share on the listing day. However, the Grey Market Price is not conclusive and the share price on the actual listing day may or may not follow through.

Is the Grey Market a part of the IPO market?

No, grey market and IPO market are two completely different marketplaces and have no connection. The IPO market is officially recognized and highly regulated by the Securities and Exchange Board of India (SEBI). The grey market, on the other hand, is completely unregulated.

Important Points to Consider About IPO GMP

  • Understanding Grey Market Dynamics:

    Grey market IPO transactions are unofficial and involve both investors and stockbrokers. Trust is crucial between both parties.
  • IPO Analysis Importance:

    Before applying for an IPO, it's essential to read our IPO analysis to make informed decisions.
  • Source of Grey Market Rates:

    Grey market rates are calculated and provided based on market research or expert insights.
  • Caution Against Grey Market Trading:

    We strongly advise against participating in Grey Market Trading due to its illegality.
  • Understanding Kostak Rate:

    Kostak Rate refers to the premium received by selling an IPO application before the issue is listed.
  • Consider Fundamentals Before Subscribing:

    Don't solely rely on the grey market premium for subscription decisions. Factors like the company's fundamentals should be considered.

What is the Kostak Rate?

The Kostak rate is the price that buyers in the IPO grey market are willing to pay for an application. For instance, let’s say that you’ve submitted an IPO application for 500 shares of a company. After witnessing the demand for the issue, you opt to sell your entire IPO application on the grey market for ₹6,000. This price at which you sell your IPO application (₹6,000) is known as the Kostak rate.

Types of Trading in Grey Market

Two types of trading happen in the IPO grey market: trading of shares before they get listed and trading of IPO applications.

Trading of shares in the Grey Market

Here’s how trading of shares in the grey market takes place:

  • An investor applies for a certain number of shares of an IPO.
  • But the investor wants to sell the shares even before it gets allotted.
  • To make the sale possible, they contact a grey market dealer.
  • The dealer gets in touch with the buyer and quotes a grey market price (which includes the GMP).
  • If the seller agrees to the price, they strike a deal and the details of the IPO application are shared with the dealer.
  • Once the shares are allotted, the seller transfers them to the demat account of the buyer through an off-market transaction and gets compensated at the agreed-upon rate.
  • If the shares are not allotted, the deal stands cancelled automatically.

Trading of applications in the Grey Market

Sometimes, entire IPO applications are bought and sold in the IPO grey market. In that case, here’s what would take place:

  • An investor applies for a certain number of shares of an IPO.
  • Due to the exceptionally high demand for the issue, they decide to sell their entire IPO application in the grey market.
  • The grey market dealer connects the seller and the buyer.
  • The buyer pays a fixed amount, known as the Kostak rate, for the entire IPO application to the seller.
  • If the shares are allotted, the seller transfers all of them to the buyer’s demat account.
  • However, if the shares are not allotted, the seller still gets to keep the amount.

Read Also: Different Types of IPO

How to Calculate Grey Market Premium?

The premium of an IPO in the grey market is actually the difference between the price at which shares trade in a grey market and the price at which they are offered in an IPO.

Grey Market Premium = Grey Market Price - IPO Price

Below are some steps to follow when calculating it:

  • Find out the IPO price:

    You can do this by looking up the price at which shares are being offered by a company that wants to go public. This information may be obtained from the company itself or through financial news outlets.
  • Discover the grey market price:

    Since this sector is unofficial, you might need to consult with brokers or visit web-based platforms where you can find out the price at which people buy/sell these stocks before they’re listed on exchanges officially. The value at which such transactions occur represents the grey market price.
  • Compute the premium:

    Deduct the IPO price from the grey market price to calculate the premium. This variance indicates how much higher or lower than official listing values such investments trade within unregulated environments like grey markets.

For instance, suppose a firm offers its stock in an initial public offering (IPO) for ₹200 per share but these same securities are traded in the grey market at ₹225 each. This means that the sellers are demanding ₹25 per share over and above the issue price. This excess of ₹25 (that is 12.5%) is nothing but a grey market premium.

Income Tax Implications of Grey Market Trades

IPO grey market transactions are mostly cash settled within the account of the applicant. As a result, this makes it a tax obligation for only one person being an applicant.

When a seller takes part in short-term transactions involving shares within the stock exchange, they are liable to incur tax on the capital gains earned from such sale. In informal markets like the grey market, profits are usually credited to the applicant for IPO who subsequently sold their application.

How can you use Grey market information when applying for an IPO?

When applying for an IPO, you can use the grey market information to determine the demand for the issue. For instance, if the GMP for an IPO is low, it is advisable to stay away from such issues since it signifies low demand. However, if the investors are willing to pay a high premium for an IPO in the grey market, you can consider applying for such an issue.

Read Also: How to Apply for IPO

Frequently Asked Questions

Yes. The profits generated by selling an application in the grey market will be categorised as short-term capital gains. As a result, you will have to pay a Short-Term Capital Gains Tax (STCG) at the rate of 15% (excluding cess and surcharges) on the profit made from such a sale.

To buy or sell IPO applications in the grey market, you will have to get in touch with interested investors by yourself or find a local dealer who can connect you to them.

As with regular stocks, demand and supply are the primary forces that decide the IPO grey market prices. For instance, if an issue is oversubscribed, the grey market price is likely to be high. On the contrary, if an issue is undersubscribed, the grey market price will mostly be low.

A high GMP suggests that there is a strong demand for IPO shares in the secondary market before listing them. This may cause an increase in IPO listing price because companies and underwriters can adjust offer prices upwards to cater for increased demand which will help them maximise proceeds.

On the other hand, when IPO GMP becomes low or negative, it shows less interest of people towards buying these securities at their current prices set by sellers at secondary markets. Therefore, in order to attract more investors and ensure successful listings at primary exchanges, IPO prices might be revised downwards when there are indications that few people are willing to buy those stocks issued by companies going public.

GMP can be considered as one of the indicators of how well an IPO can perform. It shows the difference between what people are willing to pay for shares before they’re listed and their face value.

A higher IPO GMP means that there is more demand for the company’s stock, which could be taken as a sign of trust from investors and a successful launch. Nevertheless, you must not forget that this isn’t everything – other aspects should also be considered when deciding whether or not to invest in an IPO. Factors such as financials, market conditions, industry prospects and pricing among others play equally important roles too.

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