What is the Grey Market Premium of an IPO

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No, it is not illegal.

Before understanding that, there are two other terms — white market and black market- which we should delve into. So, the white market is regulated by SEBI or any other stock exchange. It is allowed legally by law. On the other hand, the black market is very much illegal and is not supported by law. For instance, the covid wave flared the rise of the black market of medicines and other covid necessities. They were being sold at exorbitantly high prices to the people.

So, there is an area between these two markets which is called the Grey Market. The trades done in the grey market are not completely illegal but there is no regulation to control those trades too. A very relative example is the grey market of an IPO.

Grey Market in Stock Offering

Grey Market for an IPO is quite a popular concept. So, if you are a retail investor you must add it to your investor vocabulary as soon as possible. So, the SEBI regulations are applicable once the IPO gets listed in the exchange.

What happens before that?

To create a demand and supply, the IPO is introduced in the grey market so that the traders and investors buy the shares before they get listed. If an individual wants to exit the IPO for any reason, he can do it via the grey market. A company can trade its stocks and applications on the grey market before getting listed.

The grey market also helps the underwriters to predict the path of a stock after its listed on the stock market. So, if a company presents its stock through the traders before getting listed, it’s called a Grey Market Stock.

Who runs the Grey Market?

A small set of individuals run the grey market stock. The deals are based on the mutual trust of individuals and there is a mediator who ensures that the parties honor the deal. The contracts are not usually in writing in the market. Also, this kind of market operates in some cities.

For how many days does the Grey Market Stock Period Last?

When a company issues an IPO, then the stock starts to get traded at the issue price in the grey market. So, people who have a positive inkling about the stock, can go ahead and block the shares from small retailers. Such a risk is generally taken by giant investors and they might deal with multiple sellers at the same time.

What is Grey Market Premium(GMP)?

The Grey Market Premium is the price at which the IPO shares trade in the grey market. The live grey market behavior of the stock reflects how the stock will behave on a listing day. Obviously, the grey market premium of a stock depends on its demand.

Also, the Grey Market Premium is applied on a per-share level.

For instance, the issue price is 1000 INR and there is a seller who has 1 lot = 15 shares of the shares. If approached by a buyer, who offers the seller 300 INR per share to get the lot. Then the Grey Market Premium becomes 300 INR. The risk is then transferred from the seller to the buyer.

There are two other terms associated with GMP too.

• Kostak Rate: Sometimes, the buyer approaches various sellers to buy their applications as a whole. So, when the stock gets listed, then the profit/loss is borne by the buyer. Also, the dealer ensures that the seller transfers the stocks to the buyer. So, the Kostak rate is quoted per lot instead of per share. So, even if the shares are not allotted, the seller still gets the money from the buyer.
• Subject to Sauda(SS): In Subject to Sauda, if the IPO is alloted, only then does the seller get the agreed amount from the buyer. Again, the SS rates are quoted per lot.

Types of Assets Traded in the Stock Market

There are two types of deals that happen in the Grey Market of an IPO:

• Trading a particular IPO share before it gets listed in the market
• Trading a particular IPO application at a premium or rate

How do the shares get Traded in the Grey Market of an IPO?

The process highlighting the grey market ipo shares trading is as follows:

• The investors aka the sellers purchase the IPO shares through the IPO. It is completely a financial risk as the shares might also be listed at a price below the issue price.
• The buyers who find the shares to be worth more than the issue price when they get listed, try to collect the shares before it gets listed.
• The dealers are there to collect orders from such buyers at a grey market premium.
• The dealers then contact the sellers who are interested to sell the shares at the grey market premium to reduce the risk associated.
• After getting a confirmation from the seller, the dealer notifies the buyer about the shares purchased.
• If the shares get allocated to the seller then it is upto him to decide whether to keep the shares or transfer it to the buyer.
• The deal no longer stands if no shares get allocated to the seller.

Also, the Grey Market Premium is applied per share and not to a lot as a whole.

How are IPO applications traded in the market?

The process of trading an IPO application is similar, except the seller gets the premium price from the buyer even if no applications are allotted.

Whom to contact to purchase trade in the grey market?

As it is an unregulated market, you will have to contact the local dealers to help you out over a phone call with the deal.

Risks associated with the Grey Market

• The Grey market is an unregulated market and there are no written agreements between the buyer and the seller. So, if any party refuses to honor the deal, then you cannot visit the court or even SEBI.
• The Grey Market premium of a stock is no reliable data as it is not monitored by live trading.

Conclusion

So, even though the grey market is not a regulated quantity, still some people closely monitor the grey market premium. The GMP is a driving factor in the market sentiments for stock before it gets listed in the actual stock market.