A Comprehensive Guide on Grey Market in IPO

Colours like white, black and grey have different meanings in the stock market. Each colour represents a different market where operations take place either by following regulations or deviating from them. This piece talks about the grey market in IPO.

Thus, investors who are wondering what the grey market in IPO is can find a detailed guide on the meaning, operations and other related things. Read along!

Grey Market or Parallel market is an unofficial one where investors buy or sell IPO applications or shares even before they are issued by the company in IPO.

As Grey Market is an unofficial market, it does not abide by rules and regulations. Market regulators such as SEBI (Securities Exchange Board of India) do not monitor transactions in these fields, nor do they endorse them.

A small group of people run Grey Market Trading on the basis of mutual trust.

Grey Market Premium (GMP) is the price at which the shares of grey market IPO are being traded in the Grey Market.

Grey Market Premium shows the probable amount an IPO will take on the listing day.

For example, let’s say a company issues stock A at ₹ 200, and its Grey Market Premium is ₹ 40.

Here, it is expected that investors are willing to buy the shares of stock A for ₹ 240.

Though there is little reliability in the majority of cases, Grey Market Premium functions properly.

Grey Market primarily follows two methods. In the first medium, investors can buy or sell IPO shares in Grey Market before these get listed. On the other hand, investors can sell IPO applications at a fixed price.

Read the following sections to get a clear idea of Grey Market's working procedure.

Method 1 – Trading IPO Shares in Grey Market

• At first, investors bid for shares via IPO. Here, these individuals take a financial risk since there is no surety of IPO allotment in case of oversubscription, or they may get shares below the issue price. They take the role of sellers.
• There are other people who think that the value of shares is greater than the issue price and start collecting it even though they got shares through IPO allotment. These individuals take the role of buyers.
• Buyers approach Grey Market dealers and place an order to purchase IPO shares at a specific premium rate.
• After that, dealers connect with sellers who made IPO applications and ask them whether they wish to sell IPO shares at a premium rate.
• Sellers who are willing to avoid the risk of the stock market can sell IPO shares to dealers in the Grey Market and make a profit after finalising the deal.
• At this stage, the dealer obtains the seller's application details and notifies interested buyers regarding this purchase.
• In the meantime, IPO allotment takes place where investors may or may not get share allotment.
• In case sellers get an allotment of shares, dealers will call them to sell shares at a specific amount or transfer them to the Demat account.
• If investors sell shares, the settlement will occur on the basis of loss or profit and the Grey Market Premium at which they made the deal.
• If sellers do not get any allotment of shares, no deal takes place, and no settlement occurs.

Method 2 – Trading IPO Applications in Grey Market

• Buyers and sellers are present in trading IPO applications, just like trading IPO shares.
• On the basis of market conditions and assumptions, buyers decide the price of an IPO application.
• Here, sellers may determine to sell IPO applications to buyers in Grey Market. At this stage, sellers need to worry about IPO allotment. However, even if they do not get an allotment of shares, they can make a profit from Grey Market Premium.
• Next, sellers send elaborate forms to dealers. Then, dealers inform buyers that they have purchased an IPO application from sellers at specific rates at Grey Market.
• During this time, the issuing registrar completes the IPO allotment process. Here, sellers of IPO applications may get IPO allotment vice versa.
• In case allotment occurs against the sold application, dealers might call sellers to sell shares or transfer allotted shares to the Demat account.
• If sellers decide to sell shares, the settlement occurs on the basis of profit or loss.
• In the case of non-allotment of shares, the deal ceases to exist without any settlement. However, sellers receive a premium as they sell IPO applications.

As individuals are aware of the working procedure of Grey Market, let's move to discover the relation of Grey Market to the IPO market.

Grey Market is an unofficial arena where proper monitoring does not occur. On the other hand, there is an IPO market that follows the rules and regulations set by SEBI. Grey market and IPO market do not share any official connection.

In Grey Market, Kostak rates is a very popular term. Read the next section to get a clear idea of how it works.

Kostak rate is an amount that investors pay to the IPO application seller before the listing of the IPO.

For instance, Company B issues IPO at ₹ 100 per share. Here, the issues are anticipated to get listed in the next 15 days. There are some people who do not wish for 15 days and can buy or sell the shares unofficially in the grey market.

Let’s say an investor applied for shares of ₹ 3,00,000 in Company B's IPO and wants to sell the same since he or she is not sure of IPO allotment and listing gains. In such a scenario, that investor approaches a buyer for purchasing his/her IPO application and takes the risk.

If the buyer agrees to conduct the sale at an exit transaction of ₹ 7,000, this amount of ₹ 7,000 that sellers/investors get is the Kostak rate.

To be precise, investors who have a Demat account but do not want to subscribe to an IPO can sell the IPO application to an interested buyer in Grey Market. Here, the buyer will subscribe on behalf of the seller and against which he or she will pay a certain amount. This amount is the Kostak rate.

As stated earlier, Grey Market is over a counter market. Hence, investors cannot approach official authorities or persons for trading purposes.

Interested investors, meaning individuals who wish to buy and sell IPO shares in Grey Market, must find local dealers who will hunt buyers or sellers for them.

Now that investors know what Grey Market in IPO is, they can decide whether they want to take this route and invest accordingly.