Understanding the Indian Grey Market for IPOs

The Grey Market is an informal, over-the-counter (OTC) space where IPO shares are bought and sold before their official listing. It’s unregulated by SEBI and runs purely on trust and reputation.

• Represents the extra price investors are willing to pay over the issue price.
• For example, if an IPO is priced at ₹100 and trades at ₹160 unofficially, the GMP is ₹60.

• A fixed amount paid for a full IPO application, regardless of allotment. Suppose the Kostak rate is ₹100. This means even if you don’t receive any shares in the allotment, you still get ₹100 for selling your application. It offers a lower risk for the seller but also a limited reward.

This means the payment you receive is conditional on whether you get the shares allotted or not. Imagine you have applied for an IPO and want to sell your application before the actual shares are allotted. In a Subject to Sauda deal, the buyer agrees to pay you a certain amount only if you actually get shares in the IPO.

• If you do get shares, you receive the agreed amount (which is usually higher than Kostak because it’s riskier for the buyer).
• If you don’t get any shares, you get nothing.

So, it’s a riskier deal for the seller but also comes with a higher reward if the shares are allotted.

The Grey Market typically becomes active once an IPO opens for subscription. Dealers—especially in cities like Mumbai, Ahmedabad, and Surat — start circulating the GMP, Kostak, and Subject to Sauda rates through informal channels like WhatsApp groups or phone calls. These transactions are usually cash-based, have no formal agreements, and are driven entirely by mutual trust. There are no official receipts or guarantees, and most participants rely on the reputation of the intermediaries involved.

• The grey market has become more active in recent years due to:
• High number of IPOs in 2023 and 2024 (especially tech, fintech, and SME firms)
• Retail investor boom, with more people joining the markets via mobile apps
• Increased speculation, especially around oversubscribed IPOs

The Grey Market operates outside the purview of SEBI and is entirely unregulated. This means there is no legal protection available if a deal goes wrong. SEBI does not intervene in or acknowledge these transactions, making them high-risk. Any disputes or defaults must be handled informally between the involved parties, with no legal recourse.

Despite being unofficial, the Grey Market continues to attract attention due to a few reasons:

• Early insights into investor sentiment
• Listing day strategy cues
• Short-term arbitrage opportunities

These elements give retail and HNI investors a sense of how an IPO might perform. GMP, for example, can signal oversubscription or underwhelming demand, giving investors clues to adjust their investment strategy. While not foolproof, these signals often influence public perception and decision-making.

• Zero legal protection in case of disputes or defaults.
• Possible manipulation of GMP to create hype.
• No paper trail, which raises concerns over transparency and taxation.

• Issue Price: ₹100
• GMP: ₹60 → Grey Market price = ₹160
• Kostak Rate: ₹100
• Subject to Sauda: ₹200

If you sell under Kostak, you earn ₹100 regardless of whether you’re allotted shares. Under Subject to Sauda, you earn ₹200 only if shares are allotted to you.

While GMP can be a useful gauge of market sentiment, never base your entire investment decision on it. Always review:

• The company’s fundamentals
• Subscription demand across categories
• Market environment

The Indian IPO Grey Market is intriguing but risky. It gives a glimpse of investor mood, but it’s unofficial, unregulated, and prone to manipulation. Be cautious, stay informed, and focus on the bigger picture before investing.

Disclaimer: This blog is intended solely for educational purposes. Participating in Grey Market trading is not legally recognized or advised.

Read more on: www.adroitfinancial.com