A Detailed Guide on Grey Market IPO

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A Detailed Guide on Grey Market IPO

For many individuals living in this colorful world, for them, Black and white are two ends of the same paradigm, with black conveying all that is wrong and white standing for all that is pure and correct. But when you come out of the imaginary world, “only” Black or white life is impossible. Thus, at some point, we adopt a middle path, the grey.

Similarly, even the stock market has more colors like black, white, green and red and even grey. But, in this scenario, the meaning is quite different. Let’s dig in deep and understand the grey market terms, its working and more.

Grey Market IPO is an unofficial market where individuals buy/sell IPO shares or applications before they are officially launched for trading on the stock exchange. As it is an unofficial over-the-counter market, there are no regulations around it. All transactions are done in cash on a personal basis. Any 3rd party firms like SEBI, Stock Exchange or Brokers are not involved or back this transaction.

Grey market trading is done among the small set of people as there is no official platform or rules defined for these trading. Two popular terms used in the IPO grey market are ‘Grey Market Premium' and ‘ Kostak'.

Grey market premium (GPM) is a premium amount at which grey market IPO shares are traded before they get listed in the stock exchange. In simple words, the stock of the company that came up with the IPO bought and sold outside the stock market. .

The GPM reflects how the IPO might react on a listing day. For instance, if the company introduces an IPO or Rs.100 and the grey market premium is around Rs.20 then we can assume the IPO to list around 120 rupees on listing day. There is no reliability but in most cases, the GMP works properly and IPO list around the given price.

The Kostak rate is the amount where the individual pays for the IPO application before the IPO listing. One can buy and sell their full IPO application on Kostak rates outside the market and fix their profit. The Kostak rates apply in every condition you get the allotment. For instance, if one did 5 applications for one IPO and sold the same at Rs.2500 per application it means that the individual secured the IPO profit at Rs 12500. However, if he gets the allotment in 2 applications still his profit will be the same. Further, if he/she sells the stock which he earned and gets the profit around 25000 then he or she needs to give the remaining profit to the guy who bought the application.

The grey market is an unofficial market, whereas the IPO market is an official recognized medium of raising funds in the market under SEBI regulation. The IPO market and the IPO grey market do not have any official connection.

In the grey market, there are 2 ways to earn income. The first method is you can buy/sell the IPO shares in the grey market before they are listed on the stock exchange. The second method is you can sell your IPO application at a certain price.

Let’s discuss both ways individually.

Trading IPO Shares in the Grey Market:

  • Investors apply for shares via IPO. They take a financial risk as they may not get allocated any share or they receive the shares but shares may list below the issue price. These are referred to as sellers.
  • Few individuals who think that the share values more than its issue price. They start collecting these shares even before they are allocated through the IPO allotment process. These are referred to as buyers.
  • Buyers place the order to buy IPO shares at a certain premium by contacting the grey market dealers.
  • Next, the dealer contacts the sellers who applied in the IPO and ask them if they are willing to sell their IPO shares at a certain premium at this time.
  • Meanwhile, if the sellers are not willing to take risk of stock market listing and like the premium, they may sell the IPO shares to the grey market dealer and book the profit. However, the seller has to finalize the deal with the grey market dealer at a certain price.
  • The dealer gets the application detail from the seller and sends a notification to the buyer that he bought a certain number of shares from the sellers in the grey market.
  • The allotment is done and sellers may or may not receive an allotment of shares.
  • If shares are allocated to the investor, he may either get a call from the dealer to sell them at a certain price or transfer allocated shares to some Demat account.
  • If the investor is selling the shares, the settlement is done depending on the profit or loss and the grey market premium at which buyers and sellers made a deal.
  • In case if no shares are allocated to the sellers the deal gets canceled without any settlement.

Trading IPO Applications in the Grey Market:

  • Similar to IPO shares trading, even IPO applications include sellers and buyers.
  • Buyers determine the price of the application depending on multiple assumptions and market conditions. They give an offer to the sellers that they are willing to buy an IPO Application at a certain premium.
  • To be on the safe side, sellers may sell their application at a certain premium to the buyer through a grey market dealer.
  • Here, there is no need for the seller to worry about the share allotment in IPO. Even if he didn’t get any allotment he still gets the grey market premium at which he sold his IPO allocation.
  • The seller sends the detailed form to the dealer. Further, the dealer sends a notification to the buyer that he bought an IPO application at a certain premium from the sellers in the grey market.
  • The allotment is done by the issuing registrar. The application seller sold may or may not receive an allotment of shares.
  • If shares are allocated to the sold application, either seller may get a call from the dealer to transfer allocated shares to some Demat account or sell them at a certain price.
  • In the case of selling the shares, the settlement is done based on the profit or loss.
  • If there are no shares allocated to the sellers, the deal is said to be over without any settlement. However, the seller still gets his premium as he sold his application.
  • Do I have to pay taxes when I sell an application in the grey market?

    • Yes, the seller has to pay short term capital gain on the actual profit he made by selling the shares in the stock market.

  • How can I buy and sell in the Grey market?

    • As the grey market doesn’t have any regulatory authority, individuals can choose their own buyers/sellers on a personal basis.

  • What decides the IPO grey market price?

    • Similar to stock prices, Grey market price for an IPO is decided by the demand and supply numbers. If the subscription for a particular IPO is less than the stated shares, the grey market price will be lower and higher if its a reverse case.