What is the Grey Market Premium (GMP) in an IPO?

Grey Market Premium (GMP)

Grey Market Premium (GMP) is the additional price or premium amount at which the grey market IPO shares are traded before they get listed in stock market. It is the premium that investors are ready to pay in order to buy IPO stock outside the stock market. This premium is called Kostak Rate when a seller gets this premium for pre-selling of IPO shares.

Let’s understand this with an example, 

Company B decided to issue its IPO stock with 1 lakh equity shares. They are following the book-building process where the cut-off price is fixed at Rs. 300 after the closure of bids. The company’s IPO gets oversubscribed with 1.7 lakh shares. Due to oversubscription, the GMP is Rs. 150 over the likely issue price. It means investors are ready to pay Rs. 450 in total for a share. It is a positive GMP. The dealer will say it as the IPO quote in the grey market is Rs.150. If an IPO is overpriced and seems to be undersubscribed, the GMP will be negative.

Here one should know what Grey Market is. 

Grey Market

The grey market is an unofficial share trading market for IPOs. IPO shares are traded here even before the issue gets allotted and listed in the stock exchanges. Traders can sell the same number of IPO shares at a premium they had applied for.  Sometimes, the market is also called the parallel market.

It is an unregulated over-the-counter market. There are no regulations from SEBI or stock exchange around it. They do not back the trading transactions here. Stock dealers provide support to their preferred traders for IPO shares before it is formally issued. They can execute orders for them. All transactions are done in cash without any involvement of regulating authorities. Here market operators and high net worth individuals (HNIs) are the biggest players and make big bets with multiple trading accounts.

Is GMP a strategy?

Most of the time, GMP is used to create an impression for strong demand for the issue. And the strategy always works just like hypes work in the official stock market. The grey market premium is also based on company fundamentals. If they are good, investors would be ready to pay a decent price. 

Trades without IPO allotment – how is it possible? 

Trades are regularized on a listing day. Before that, trade payments in the grey market are done purely on faith. When an IPO share price seems overvalued, it attracts sellers whereas when it is fairly priced and thus going to be oversubscribed, it attracts more buyers in the grey market. The same IPO can be tagged as overvalued or reasonably priced by different traders. If an individual feels that the IPO is overvalued will be a seller in the market. He will hand over the allotted shares to the dealer in the grey market just after allotment. A power of attorney is prepared to ensure that the shares will be sold as soon as it reflects in the demat account. However, if somebody refuses to fulfill a commitment in the grey market, the counterparty cannot take legal action.

Retail investors are also active in the active market. They are the sure investors to get the same lot shares they had applied for. In case, an individual does not get the same lot they had sold in the grey market, they need to buy the shares from the stock market and handover to the dealer.

The Bottom Line 

An investor can get an idea of the success of an IPO from GMP. But it is a highly risky zone to make an advance trade. HNIs are the main players in the grey market who have an appetite to adjust losses but a retail investor may not have. Therefore, they need to be more careful.

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