The IPO space in India has always been of great interest. Whenever a company goes public - whether it’s a tech giant or a startup - its Initial Public Offering (IPO) attracts a lot of investors hoping to get a stock before it lists on the exchanges. But here’s the thing - before the shares even hit the stock exchanges like the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange), there's already some trading happening through something called the IPO grey market. It’s an informal setup where IPO shares are traded ahead of the listing day.
In this post, we’ll discuss how this market works, what the IPO grey market premium actually means, how it’s calculated, and why people care about it so much. We’ll also see whether it really says anything about the stock’s listing day performance.
How does the IPO grey market work?
The IPO grey market (or parallel market) operates unofficially outside of stock exchanges, without any regulatory support. Here, investors and traders deal in IPO shares before the company is listed on the stock exchanges. These deals are based on trust between the brokers and investors, and the market isn’t really accessible to everyone. You can either buy IPO shares directly or purchase IPO applications. These grey markets provide insight into how the company might perform after its listing. As an investor, you can also easily exit the IPO or buy IPO shares even after the deadline. In the parallel market, Kostak and grey market premium (GMP) are two things you have to pay close attention to.
What is the grey market premium in IPO?
The IPO Grey Market Premium or IPO GMP is the difference between the issue price and the estimated listing price of the IPO in the grey market. It's the unofficial price which gives us a rough idea of how the IPO might perform on the listing day. If demand is high, the GMP goes up. If it’s low, the premium drops or turns into a discount. The price agreed upon is what creates the IPO grey market premium (GMP). For example, if a company’s IPO is priced at ₹100, and the GMP is ₹150, it means there’s demand at ₹250 per share in the grey market.
How is GMP calculated?
IPO GMP is calculated using a simple formula: GMP = Grey Market Price – IPO Issue Price
- First, you need to know the issue price at which the company is offering its IPO shares.
- Next, the grey market price is the unofficial price of the shares traded in the grey market.
For example, let’s use the latest data for Virtual Galaxy IPO shares. Their issue price is ₹142, and the IPO grey market premium is given as ₹10. By using the above formula to calculate the grey market price, we get: Grey market price = ₹142 + ₹10 = ₹152.
So, Virtual Galaxy's shares are being traded in the grey market at ₹152, which is ₹10 higher than the issue price.
If you want to calculate the GMP percentage, divide the GMP by the issue price and multiply by 100:
GMP % = (GMP ÷ Issue Price) × 100
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In the case of Virtual Galaxy, the GMP per cent would be:
GMP % = (10 ÷ 142) x 100 = 7.04%.
The 7 per cent GMP suggests mild positive sentiment around the IPO. It gives a hint of listing expectations, but actual listing prices may vary depending on the broader economic conditions, market trends, and overall demand.
Types of trading in the IPO grey market
In the IPO grey market, trading usually happens in two ways:- Trading allocated shares before their listing: Once IPO shares are allotted, traders may sell them in the grey market before the listing day. These trades happen at a premium or discount, depending on demand and market sentiment, with traders taking on the financial risk.
- Kostak rate (IPO application trading): Here, an entire IPO application is sold at a fixed price, called the Kostak rate. For example, if the Kostak rate is ₹800, that’s the upfront amount a buyer pays regardless of whether their application gets an allotment or not. It's a way for sellers to lock in profit without worrying about the outcome.
To monitor the latest IPO GMP, consider checking out Avanse Financial, BMW Ventures, and many others to see how they perform in the grey market.Trading IPO shares in the grey market
Here’s how the IPO share trading process works in the grey market: - If you apply for IPO shares and don’t want to wait for the market listing, you can sell the shares in advance through a grey market dealer.
- The grey market dealer acts as a middleman, connecting buyers and sellers and locking in the agreed premium.
- Interested buyers quote a premium price to the dealer based on market buzz and demand.
- If you are allotted the IPO shares, you can either transfer them to the buyer’s demat account or sell them at the pre-fixed price to avoid the risks of stock market listing.
- If IPO shares are not allotted, the trade is void, and no exchange takes place.
Factors influencing IPO GMP
Since IPO GMP runs outside official channels, several factors come into play:- Market sentiment: The IPO Grey market premium mostly reflects the investors’ hype, and broader market trends or events can quickly impact the stock performance.
- Regulation: The grey market isn't overseen by any authority or regulatory bodies, which can be problematic in case of disputes.
- Manipulation: Due to the unregulated market, big investors can influence GMP to create artificial demand.
- Inaccuracy: IPO GMP can be used as a potential indicator, but it doesn’t guarantee listing day success. Sometimes, even with a high GMP, stocks’ performance may drop.
Does GMP affect IPO listing price?
The IPO grey market premium tells us how investors feel about the IPO shares before they list, but it’s not a foolproof indicator. While a high GMP suggests strong demand, it doesn’t guarantee the IPO will list at a higher price. Factors such as market conditions, investor demand, company performance, and global economic regulations or trends can all impact the actual listing price. So, while GMP can help gauge interest, it’s important to do your research on the company and broader market before making any final investment decisions. It’s always better to look beyond the IPO GMP for a clearer picture.
