What is grey market IPO or GMP?

By | January 3, 2018

What is IPO grey market Or GMP? 

What is IPO grey market Or GMP?

All those people who invest in the stock markets are familiar with the initial public offerings (IPOs). People who apply for the IPOs must have heard the term grey market or grey market price, GMP, Kostak Rates and Sauda rates. So, what are these terms? New investors are very eager to know about the grey market and the first question comes to their mind is What is IPO grey market? How does it work? Today in this article, we will try to explain everything about the grey market in a very easy way.

IPO Grey Market

What is an IPO?
  • The full form of IPO is Initial public offering.
  • IPO is also known as going public or stock market launch.
  • Initial public offering or the IPO is the first time when the stock or share of a company is offered to the public.
  • In India, IPOs are regulated by the Securities and Exchange Board of India (SEBI) under the Securities Act of 1956.
  • The company lists its shares on a recognized stock exchange through an IPO.
What is a grey market?
  • The term grey market is used in the IPO market to trade shares before listing.
  • Grey Market is an unregulated and unofficial market to trade shares of IPOs before the official listing on the stock exchanges.
  • The trade in the grey market begins before the IPO opens for the subscription.
What does the grey market premium / price mean?
  • The meaning of the grey market price is the ‘premium’ over the IPO price.
  • This means if a grey market broker says that the price of the IPO is Rs. 10 in the grey market, it indicates that the demand of the IPO is Rs. 10 above the issue price.
  • For an example, If the IPO price is Rs. 10 and grey market price of the IPO is Rs. 5, it means that the listing price of the IPO will be Rs. 15.
More Examples
Issue Price = Rs. 100
Grey Market Premium = Rs. 20
This means buyers are ready to buy the shares at Rs. 100 + Rs. 20 = Rs. 120

Issue Price = Rs. 100
Grey Market Premium = Rs. 20 (Seller)
This means sellers are ready to sell the shares at the discount Rs. 100 – Rs. 20 = Rs. 80

Who decides grey market price?
  • The grey market price or GMP is set by merchant banker, company promoter and market operators.
  • Market operators are connected with the company promoters.
  • The whole thing is done to create a strong demand for the IPO.
  • There are many other factors such as company fundaments are essential to set the price.
  • If the fundamentals of the company are good, market operators pay a healthy premium.
  • The company with a poor or bad fundamentals cannot influence the price beyond a point.
  • High net-worth individuals or HNIs and market operators move the price of the IPO.
  • HNIs put big bets on the IPO using borrowed money
What are the other important factors which influence the price?
  • The pricing of the IPO is also a major factor, if the IPO price is overpriced, the grey market price will be low.
  • Overprice or expensive IPO do not get many buyers on a listing day.
  • The overall market sentiment is the other factor which influences the grey market rates.
  • If the Overall market sentiment is good, the prices will be up and if the market sentiments are bad, the premium will shrink.
How are trades done in the grey market?
  • The trades are done in the grey market before the official listing.
  • All trades are done on the purely on faith.
  • The trades are regularised on a listing day by executing the orders into the official trading system.
What is the Kostak Price?
  • Kostak Price means the price for the IPO application.
  • Kostak price is a premium amount which seller gets by selling their IPO application to the grey market broker before the allotment of the IPO.
  • It is also an off-market and unofficial trade.
  • Kostak trades are done when people do not want to take the risk with IPO allotment or listing gains.
  • Once investors sell the application under the Kostak, he or she gets the promised amount whether they get an allotment of the shares or not.
  • Kostak deals are good when the chances of the allotment are low or the fundamentals of the company are weak or the overall market sentiments are bad.
What is the Subject to sauda deals?
  • Subject to sauda deals are same as Kostak Price, But you only get money if you get an allotment.
  • In other words, If the seller has sold their application via the Subject to sauda deals, he or she only gets the promised money if they get an allotment.

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