Trading in the IPO Grey Market starts as soon as the IPO issue price is announced and continues until the shares are officially listed on the exchange. Here are the key features of IPO Grey Market trading:

• Unofficial and Unregulated Market: The Grey Market operates outside the purview of regulatory bodies, making it an informal trading environment.
• Telephone-Based Transactions: Trading typically occurs through telephone calls, reflecting the market’s informal nature.
• Cash Settlement: Trades are settled in cash, often facilitated by traditional Angadia services.
• Trust-Based Transactions: The Grey Market relies heavily on mutual trust between parties due to the absence of formal agreements.
• 24/7 Trading: The market operates around the clock, offering continuous trading opportunities.
• No Regulatory Oversight: There is no regulatory body governing Grey Market activities.
• No Registered Dealers: Transactions are conducted without the involvement of official or registered dealers.
• Lack of Formal Contracts: Deals are made without formal contracts, adding to the market’s inherent risk.

Grey Market trading usually involves three parties: the buyer, the seller, and the dealer, with transactions occurring through either IPO shares or applications.

To trade in the Grey Market, an investor must first locate a reliable dealer, typically through trusted referrals. Once connected, the investor can place an order via a phone call. Trading begins as soon as IPO news breaks until the day before the listing. Settlement occurs on the listing day at 9:45 AM, after which the Grey Market window for that IPO closes. Grey Market trades also have a 90-day expiration period; if an IPO does not list within this timeframe, the deal is cancelled.

On the listing date, dealers execute buy/sell orders based on their net delivery positions at the equilibrium price. Trade accounting is managed using basic tools like Excel or Tally. On settlement day, the Angadia service is employed for door-to-door cash collection or delivery.

Given the lack of formal oversight and the reliance on trust, trading in the Grey Market carries significant risks. If one party defaults, there is little recourse, highlighting the importance of caution in this unregulated market.

IPO Grey Market Rate Types

1. IPO Grey Market Premium (GMP)

The IPO Grey Market Premium (GMP) reflects the difference between the price at which IPO shares are traded in the grey market and their issue price. This premium can be positive or negative, serving as a key indicator of market sentiment toward the IPO.

• Positive GMP: A high or positive grey market premium for ipo suggests strong demand for the IPO, indicating that the stock is likely to perform well upon listing. For example, if the IPO issue price is Rs 500 and the GMP is Rs 150, the expected listing price would be around Rs 650, reflecting a 30% gain.
• Negative GMP: A low or negative grey market premium for ipo indicates uncertainty or lack of interest among investors, suggesting a potential listing at a discount. For instance, if the IPO issue price is Rs 500 and the GMP is -Rs 200, the anticipated listing price would be Rs 300.

Example of GMP with Listing Gain:

If the IPO issue price is Rs 500 and the GMP is Rs 300, a buyer in the grey market is willing to purchase the shares at Rs 800. Suppose a seller has 15 shares with an application value of Rs 7,500 (15*500). The grey market buyer would pay Rs 12,000 (15*800) for these shares.

• Seller’s Profit: Rs 4,500 (Rs 12,000 – Rs 7,500)
• Buyer’s Profit (if listing at Rs 1,200): Rs 6,000 (Rs 18,000 – Rs 12,000)

Example of GMP with Listing Loss:

Continuing the above scenario, if the listing happens at Rs 600:

• Seller’s Profit: Rs 4,500 (remains the same)
• Buyer’s Loss: Rs 3,000 (Rs 9,000 – Rs 12,000)

The seller’s profit remains consistent, but the buyer incurs a loss because the listing price was below the GMP.

2. Kostak Rate

The Kostak rate is a fixed price at which IPO applications are bought and sold in the grey market, regardless of whether the shares are allotted. This price is agreed upon between the buyer and seller and applies to the entire application, not per share.

For example, if an investor applies for 15 shares at Rs 500 each, totalling Rs 7,500, another investor might agree to pay Rs 1,000 as a premium to purchase the entire application. The seller secures a fixed profit of Rs 1,000, irrespective of the allotment outcome.

• If Allotment Occurs: The seller passes on the listing gains to the buyer or credits the shares to the buyer against Rs 8,500 (Rs 7,500 + Rs 1,000).
• If No Allotment: The buyer still pays Rs 1,000 to the seller.

3. Subject to Sauda

The “Subject to Sauda” rate is an extension of the Kostak rate, where the buyer agrees to pay a fixed price only if the seller receives the IPO allotment. These rates are usually higher than Kostak’s rates due to the added certainty of allotment.

For example, if a buyer agrees to pay an additional Rs 4,000 for the entire application provided the seller secures an allotment:

• If Allotment Occurs: The buyer pays Rs 4,000 as a premium, and the seller either passes on the listing gains or transfers the shares for Rs 11,500 (Rs 7,500 + Rs 4,000).
• If No Allotment: The deal is cancelled, and no payment is made.

This structure allows the buyer to secure shares with the confidence of allotment, while the seller benefits from a potential premium if allotment occurs.

IPO Grey Market Premium Vs Kostak

Grey Market Premium vs Listing Price

Grey Market Trading: Pros and Cons

Advantages of Grey Market Trading

• Profit Potential: Grey market trading can increase the likelihood of making a profit from an IPO by capitalizing on the demand for shares before they are officially listed.
• Pre-Listing Trading: Investors have the opportunity to trade IPO shares before they are listed on the stock exchange or even before the IPO subscription period ends.
• Post-Subscription Purchase: Investors can still purchase IPO shares after the subscription window closes, allowing for greater flexibility in trading.
• No Application Limits: There is no restriction on the number of IPO applications that can be traded in the grey market, offering more trading opportunities.

Disadvantages of Grey Market Trading

• High Risk: The grey market is unregulated, which means that investors are exposed to a high level of risk, including the potential for significant financial loss.
• No Grievance Redressal: In the event of fraud or other issues, there is no official grievance forum or legal recourse available to investors.
• Potential for Losses: If the IPO lists at a discount, investors may face losses on their grey market trades.
• Lack of Formal Agreements: Transactions in the grey market are based on trust, with no written or official agreements, leaving investors without proof of purchase or sale.

How to Leverage Grey Market Information When Applying for an IPO

Gauge IPO Demand
The grey market premium is a valuable tool for gauging the demand for an IPO. A high GMP suggests strong interest in the IPO, indicating that many investors are keen on acquiring shares, which could lead to a successful listing.

Assess IPO Risk
It can also serve as an indicator of risk. A low or negative GMP suggests that demand for the IPO is weak, signalling potential risks. Investors may view such IPOs with caution, as the lower demand could result in poor performance post-listing.

Determine IPO Listing Price
The SME IPO  premium can also be used to determine the listing price. If the GMP of the IPO is high, it indicates that the IPO is likely to list at a premium to the issue price.

Is Grey Market Premium Good or Bad?

Grey Market Premium can be beneficial if used wisely. It serves as a key indicator of the anticipated listing price and can be an effective hedging tool rather than a gamble. GMP reflects market sentiment and the demand and supply dynamics of IPO shares, providing investors with insights into the likely performance of an IPO upon listing.

While GMP is not always a perfect predictor of listing prices, monitoring it can help investors make informed decisions about their investments and gauge the potential success of an IPO.