IPOs: Understanding grey market and GMP

The spate of initial public offerings (IPOs) in the country this year has resulted in significant investment being poured into the likes of Zomato, Devyani International, Krsnaa Diagnostics, Windlas Biotech, and Exxaro Tiles. This has resulted in a grey market or unofficial marketplace for buying & selling of unlisted securities regaining momentum. Let us understand more about the concept of grey market in the context of an IPO and grey market premium (GMP).    

Grey market 

A grey market is an unofficial market generally run by a small set of individuals to buy or sell shares of applications before they are officially launched for trading on the stock exchange. Since this is an unofficial market, there are no rules and regulations. Market regulators such as Securities & Exchange Board of India (SEBI) does not regulate such transactions or endorse them. However, an important distinction to make here is that while the grey market is unofficial, it is not an illegal market.   

With the aid of the grey market, companies that are seeking to issue a stock can assess what the demand for the new offering will be. This is because the market operated as a ‘when-issued market.’ It means that although the trades that occur in this market are binding, they are not capable of being settled until official trading of the security commences. Naturally, there is an element of risk and institutional investors, ranging from pension funds & mutual funds, stay clear of partaking in grey market trading.  

Ordinary retail investors can still use the grey market as an indicative tool in order to discern how a stock would perform after it is listed on the market by looking at the grey market premium.   

Grey market premium (GMP)  

GMP indicates the price that grey market buyers are willing to pay over and above the allotment price asked by the company. As such, GMP indicates that the offer is likely to list at higher prices and reward successful applicants. On the flip side, a grey market discount indicates that the offer is likely to list at lower rates. 

Take for instance the following example. A person has been allocated 100 shares of ABC that have specified issue price as part of an upcoming IPO. Let’s say that the issue price of stock ABC amounts to Rs 250. Now, if the grey market premium that prevails amounts to Rs 450, it implies that investors and traders alike are willing to avail of the stock of the company ABC for a price of Rs 700 (Rs 250 + Rs 450).  Although there is no reliability; in most cases, if the IPO is in demand and the estimated HNI & QIB subscription is on a higher side, the IPO is listed around the given price with an estimated IPO GMP.