What is Grey Market in IPO and How It Works
When an IPO (Initial Public Offering) grabs attention, you’ll often hear people talking about the Grey Market. But what exactly is it? Why do investors track Grey Market Premium (GMP) before an IPO is listed? And how does it impact your decision-making?
Let’s break it down in simple terms.
IPO Grey Market Explained
The Grey Market is an unofficial platform where investors buy and sell shares of an IPO even before the company lists on the stock exchange. Think of it like a pre-launch buzz — investors trade IPO shares based on expectations.
The key point? This market isn’t regulated by SEBI (Securities and Exchange Board of India). It runs purely on trust and demand-supply.
How are Unlisted Shares traded in the IPO Grey Market
Let’s say a new company is coming out with an IPO, and the issue price is ₹100 per share. But before the IPO gets listed on NSE/BSE, people are already willing to pay ₹150 per share in the grey market. That ₹50 difference is called Grey Market Premium (GMP).
Here’s how investors participate:
1. Buying IPO shares in advance
Investors who didn’t get IPO allotment or want to increase their stake approach grey market dealers to buy IPO shares before they list.
2. Selling IPO shares in advance (Offloading Allotment)
People who expect a listing gain agree to sell their shares in advance, hoping for a higher premium.
3. Dealing through ‘Grey Market Dealers’
These are unofficial brokers or contacts who connect buyers and sellers. Everything happens offline—usually via phone calls, WhatsApp messages, or through word of mouth.
What is IPO Grey Market Premium (GMP)
The Grey Market Premium (GMP) represents the additional amount that investors are willing to pay over the IPO issue price in the unofficial (grey) market, prior to the stock’s official listing. It serves as an informal indicator of market sentiment and expected demand for a particular IPO.
For example, suppose a company named XYZ Ltd is set to launch its Initial Public Offering (IPO) in the coming week. Each IPO lot consists of 10 equity shares, with an issue price of ₹1,000 per share.
In the grey market, if prospective buyers believe the stock is worth ₹1,200 per share, they are willing to pay an additional ₹200 per share over the issue price. In this case:
The Grey Market Price (GMP) is ₹1,200.
The Grey Market Premium is ₹200 (i.e., ₹1,200 – ₹1,000).
GMP is often expressed in percentage terms to assess relative market sentiment. In this example:
Grey Market Premium (%) = ₹200 / ₹1,000 × 100 = 20%.
When the Grey Market Price exceeds the issue price, the IPO shares are said to be trading at a premium, indicating positive market sentiment. Conversely, if the Grey Market Price is below the issue price, the shares are trading at a discount, which often signals weak demand or lack of investor confidence.
Typically, IPOs with shares trading at a premium in the grey market attract more applications from investors and traders. On the other hand, IPOs trading at a discount in the grey market may receive a muted response or even get avoided by retail and institutional investors alike.
How GMP Influences IPO Pricing
Grey Market Premium (GMP) doesn’t directly influence the IPO issue price, because the IPO price is already fixed by the company and its merchant bankers before the grey market starts buzzing. But GMP does influence investor sentiment, which can impact:
1. Retail Subscription Levels
When GMP is high, more retail investors rush to apply. They expect listing gains and don’t want to miss out. This often leads to oversubscription, especially in the retail and HNI categories.
2. Anchor Investor Confidence
Big investors (like mutual funds or institutional players) use GMP as a temperature check. If GMP is strong, they see strong market demand and are more likely to invest during the anchor round confidently.
3. Grey Market Buzz Affects Listing Day Price
While GMP doesn’t change the issue price, it often sets expectations for the listing price. A high GMP builds hype, and that can lead to aggressive buying on listing day—pushing the stock price even higher. Conversely, a weak or falling GMP might lead to a dull listing.
For example: Suppose an IPO has an issue price of ₹100 and GMP is ₹70. That signals a strong demand, and traders expect listing at ₹170 or more. This expectation alone can drive pre-listing demand and post-listing trading volumes.
Final Thoughts
The grey market is a good tool for measuring IPO buzz, but it’s not a foolproof way to predict success. Use it for what it is; a sentiment indicator, not an investment guarantee. Stick to your research, stay informed, and don’t fall for hype.
FAQs on IPO Grey Market
Investors track GMP because it gives them a quick signal of how hot the IPO is, whether it’s worth subscribing to, and what kind of listing gain they can expect.
No, relying solely on the Grey Market Premium (GMP) to evaluate an IPO is not advisable. While GMP can offer a preliminary view of market sentiment, it is neither official nor always accurate.
No, a strong Grey Market Premium (GMP) does not guarantee positive listing gains. While GMP reflects optimistic sentiment in the unofficial market, it is not a foolproof predictor of how the stock will perform on the listing day.
Use GMP as a sentiment indicator, not a guarantee. Always do your own research on company fundamentals, valuation, and sector performance before applying for an IPO.
Trading in the Grey Market is neither explicitly legal nor illegal—it operates in an unregulated space, which is why it’s termed a “grey” market.
GMP is purely based on demand and supply in the unofficial market. If more people want the shares than those willing to sell, GMP rises.
The difference between GMP and Kostak is that GMP refers to the premium for one share, while Kostak is the premium for the entire IPO application, regardless of whether shares are allotted or not.
The Kostak Rate refers to the premium amount an investor receives for selling their entire IPO application to a third party, regardless of the allotment outcome. This transaction allows the seller to exit the IPO process early, locking in a fixed profit while transferring both the potential upside and the risk of non-allotment to the buyer.
For example: Suppose you applied for an IPO but choose not to wait for the allotment results. You decide to sell your application in the grey market for a Kostak Rate of ₹800.
If shares are allotted, the buyer receives them.
If no shares are allotted, the buyer bears the loss.
In both scenarios, you retain the ₹800 Kostak premium, irrespective of the IPO result.
This concept is similar to selling a lottery ticket before the draw; you forgo potential gains but eliminate the uncertainty and risk. Kostak deals are based purely on trust and are common in high-demand IPOs where grey market activity is robust.
Still have questions? If you need more information or have specific questions, feel free to reach out. We’re happy to help you find the answers you’re looking for.