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IPO Grey Market

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.

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.

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.

How does the Grey Market work?

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 more: Different Types of IPO]

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 more: 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.

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