The grey market is an unofficial and unregulated market where securities, goods, or services are traded. Here price manipulation is on very high level. But this trading is done on legal platforms. In the filed of stock markets, grey market transactions is done before a stock of any private company is officially listed on an exchange to become public. This market gives a picture of sentiment of investors that whether they are interested in subscribing the stock or not.
Grey market trading provides early opportunities, or traders or investors to buy a stock before listing on exchange.
What is the Grey Market and How Does it Work?
The grey market in India is a informal platform for investors and traders to trade shares of an upcoming IPO before its official listing. These trading is done on outside stock exchanges and are not regulated by the Securities and Exchange Board of India (SEBI), there is no legal protection for participants.
Grey Market Participants
Retail Investors: After an IPO is announced by any company, retail investors bids to buy shares in the grey market. They can bid by their broker account. Retail Investors bid according to subscription status. They check premium and if it shows positive, they bid to earn that premium after listing. Once listed many retail trader sell their trades on the listing day.
Stock Brokers: These brokers facilitate transactions between buyers and sellers in the grey market.This brokers act as middlemen who handle the buying and selling of shares in an unofficial, off-exchange market.
How Shares Move in the Grey Market
The shares which are being traded in the grey market are typically not yet in the hands of the investors who applied for the IPO. Rather, transferred through brokers who have access to the IPO allotment process. In some cases, large institutional investors may be involved in moving these shares.
Once the IPO allotment is done, and shares are credited to the accounts of those who applied, these investors may sell their shares in exchanges.
Who Sets the Grey Market Price?
Demand and Supply: The price in the grey market is driven by the demand and supply of the stock. If many people demand for the stock or bid at premium price, the GMP will be high. If the sentiment is negative, the price may be low or even negative.
Market Sentiment: Some times premium depends on Market sentiments. In India if Nifty is trading in negative for months, listing of stock is negative.
Understanding the Grey Market in India
Grey markets are driven by speculation. Traders and investors anticipate whether an IPO will be successful or not based on GMP, overall market conditions, and company fundamentals. However, the absence of regulatory oversight means grey market trading is purely demand-driven and speculative.
Mechanism of Share Allotment Between Anchor Investor and Retail Investor
Anchor Investors in IPOs
- Anchor investors are mostly large institutional investors (such as mutual funds, insurance companies, pension funds, etc.) who purchase shares of unlisted company before it opens to the general public.
- Anchor investors make a commit to buying a substantial portion of the IPO shares, typically 30% of the total IPO size, through a process called the Anchor Investor Allotment. This gives a positive sentiments for listing of stock at premium.
Process of Anchor Investment:
- Pre-IPO Commitment: Anchor investors are allowed to commit to purchasing shares in an IPO before the official offering period opens for all investors.They buy the shares at a predetermined price, which is typically close to the issue price of the IPO.
- This allotment occurs one day before the IPO opens for retail investors. However, their shares are subject to a lock-in period (usually 30 days), during which they cannot sell the shares once the stock lists on the exchange.
How Anchor Investors Get Shares:
- Allocation by the Company: There is difference between allotment of shares between retail and institutions. These investors do not participate in the same process as retail applicants. Generally retail can get their allotment from their brokers and they have limit for lot size , mean quantity of share they can buy. But anchor investors commit for big portion and thieir allotment is done by company.
- The company sets aside a portion of the shares in the IPO (usually 30%) specifically for these anchor investors.
- Price: Anchor investors buy shares at a price set by the company, which is typically disclosed in the red herring prospectus (RHP), and this price can sometimes be at a slight discount to the final issue price for retail investors.
Example of Anchor Investment:
- Zomato IPO (2021): During Zomato’s IPO, anchor investors such as ICICI Prudential and SBI Mutual Fund were allotted shares before the IPO opened for the public. These anchor investors committed a large sum and were allocated a significant portion of the IPO before retail investors had a chance to apply.
Key Differences Between Anchor Investors and Retail Investors:
- Anchor investors are institutional entities or large investors, while retail investors are typically individuals applying through the public offer.
- Anchor investors can invest before the public offering opens (even one day before) and are allotted shares separately by the company, which they commit to buying.
- Retail investors only buy shares after the allotment and only through brokers once the IPO officially opens to the public.
Why Do Investors Buy Grey Market Stocks?
Early investment opportunity before the official listing.
Potential to earn a premium if the IPO gets high demand.
Gauge market sentiment based on Grey Market Premium (GMP).
What is Grey Market Premium (GMP)?
GMP is the price above the issue price. Issue price is fixed by Company. If the share priice in grey market is trading above issue price then it is refer is premium over issue price GMP is an indicator of market sentiment toward the IPO and is calculated as:
\[ GMP = Grey Market Price - IPO Issue Price \]
For example, if an share of company is issued at INR 500 and the grey market trading price is INR 600, then the GMP is INR 100. A positive GMP indicates high demand, while a negative GMP suggests weak investor interest.
Factors Affecting GMP
IPO Subscription Demand: Higher the demand, higher the GMP.
Market Conditions: A bullish market leads to a higher GMP.
Company Reputation: Established brands get higher GMPs.
Sector Performance: A booming sector results in a strong grey market interest.
IPO Grey Market Dealers
Grey market dealers are intermediaries who connect buyers and sellers for unofficial share transactions. These dealers operate informally and are known only through word-of-mouth networks. Grey market dealers are usually unregistered brokers or intermediaries who facilitate the buying and selling of shares in the grey market. They are not officially regulated by stock exchanges, so their operations are informal and exist outside of the official trading platforms.
Trading in the Grey Market
Grey market trading involves buying IPO shares at an unofficial rate before the stock is officially listed. This allows traders to profit from anticipated price movements, but it also carries significant risks.
Risks Involved
Regulatory Risk: No SEBI oversight. Their is no control over speculation and guarantee of share credit.
Counterparty Risk: There is no legal trade agreements is done during buy and sell.
Price Manipulation: GMP can be speculated. Price is in hand of seller only. There is no authorize platform where you can compare with real price.
Liquidity Risk: Unregulated transactions may lead to defaults. Means if you got shares, you cant sell it.
How to Calculate Grey Market Premium?
If the IPO price is INR 200, and in the grey market, the stock is trading at INR 250:
- GMP = INR 250 - INR 200 = INR 50.
- If an investor has 100 shares, the expected profit before listing = 100 * INR 50 = INR 5000.
IPO Grey Market Rate Types
1. GMP with Listing Gain: If GMP remains high and stable, the stock is likely to list above its IPO price.
2. GMP with Listing Loss: A declining or negative GMP indicates weak demand and a potential listing below the issue price.
3. Kostak Rate: This represents the price at which an investor can sell their IPO application before allotment.
4. Subject to Sauda: This is a conditional deal where an IPO application is sold only if shares are allotted.
Understanding Kostak Rate
It refers to the price at which an individual or an investor can sell the "right" to apply for an IPO to another investor before the IPO is listed on the stock exchange.
In simpler terms: If the Kostak rate is 100 for a particular IPO, you can sell the right to apply for that IPO to someone else for 100, and that person will then apply for the shares on your behalf. It is just like a getting a receipt for a IPO application. If you didnt get allotment , atleast you will get that money which seller has committed.
Example of Kostak Rate
- An investor applies for an IPO at INR 1 lakh.
- A buyer in the grey market offers INR 10,000 as a Kostak rate.
- Even if no shares are allotted, the investor still earns INR 10,000.
Subject to Sauda Explained
Unlike the Kostak rate, subject to sauda is an agreement where the buyer pays only if shares are allotted to the seller. If the seller does not receive any allotment, the deal is canceled.
Historical GMP Trends
Let us consider previous Grey Market Premium (GMP) trends, that can help us understand its influence on IPO listing prices and investor sentiment. Let’s break down these trends:
1. Historical GMP Impact on Listing Prices
Positive GMP (Bullish Sentiment): A high GMP in stock indicates that the market is expecting strong listing gains. If GMP is 10-30% or more above the issue price, it often correlates with an opening day price above the offer price. For example:
- Zomato (2021): The IPO of zomato in 2021 had got listed on exchange. It had a GMP of around 60% before listing, and it listed at a premium price of approximately 50% higher than its issue price.
- Nykaa (2021): Nykaa had a GMP of 50-60%, and it also listed at a significant premium, which reflected strong market confidence in the company’s growth potential.
Negative or Low GMP (Bearish Sentiment): A low or negative GMP suggests a lack of confidence in the stock’s post-listing performance. Historically, such IPOs tend to have weak listings or, in worst cases, list below the issue price.
- Dish TV (2007): The GMP before listing was negative, and the stock listed at a discount to the offer price.
- Jet Airways (2014): During its IPO in 2014, Jet Airways had a very low GMP, signaling weak market confidence. It faced challenging market conditions, and its stock listed flat with little to no premium.
2. GMP and Investor Sentiment
Indicator of Market Sentiment: GMP is often viewed as a reflection of investor sentiment. When markets are doing well, investors are more willing to pay a premium for IPOs in the grey market. During bullish phases, you might see a higher GMP for tech or new-age companies.
Recent Performance of the IPO Market: If a series of IPOs have seen strong listing performances, it raises investor expectations, thus driving up GMP for new IPOs. For example:
- 2020-2021 Boom: During this period, numerous IPOs had high GMPs (e.g., IRCTC, SBI Cards, Route Mobile), creating a sense of FOMO (fear of missing out) among retail investors, thus inflating GMP.
Market Correction or Volatility: when the market is in a correction or faces sudden volatility (e.g., a crash or political instability), GMPs get decreases or go negative. This happened in 2018 and during the COVID-19 crash in 2020, when many IPOs either had flat GMPs or low premiums.
3. Influence of GMP on Subscription Numbers
- GMP Drives Subscription Levels: A high GMP can increase demand during the IPO subscription phase. Investors anticipate profits post-listing, leading to higher applications and potentially oversubscription.
- Example: The SBI Cards IPO in 2020 had strong GMP and became oversubscribed by over 25 times, reflecting the high investor confidence driven by the grey market.
4. Sector-Specific Trends
Tech and New-Economy Stocks: Historically, tech and fintech IPOs have enjoyed higher GMP due to their growth potential and investor appetite. For instance, IPOs like Zomato, Nykaa, and Policybazaar saw high premiums in the grey market because investors anticipated strong growth.
Traditional Businesses: On the other hand, traditional or less exciting IPOs (like some in the manufacturing or infrastructure sectors) typically see lower GMPs, as the market has lower expectations for their listing performance.
Institutional Investor Influence on GMP
Anchor investors and QIBs play a significant role in GMP trends. Higher institutional investor participation usually results in a stable GMP.
1. Anchor Investors and QIB Participation
- Large institutional investors like mutual funds, FIIs, and domestic institutions often subscribe to IPOs at the anchor stage.
- Their involvement boosts confidence in the IPO, increasing demand and, consequently, the GMP.
- If QIB participation is low, it may negatively impact GMP.
2. How GMP Reacts to Institutional Interest
- If major institutions aggressively subscribe, GMP may rise significantly before listing.
- If demand is weak, GMP can fall even if the retail segment remains interested.
3. Lock-in Period and GMP Volatility
- Institutional investors typically have a lock-in period (30-90 days for anchor investors).
- Once the lock-in expires, selling pressure may lead to GMP fluctuations.
4. Foreign Institutional Investors (FIIs) vs. Domestic Institutions (DIIs)
- Strong FII participation often signals global investor confidence, leading to higher GMP.
- DII participation is more stable but may not cause significant GMP spikes.
IPO Lock-in Period Impact on GMP
The IPO Lock-in Period can significantly impact Grey Market Premium (GMP) and post-listing price stability. Here are key aspects to consider:
1. Understanding IPO Lock-in Period
- Definition: A lock-in period is the duration during which certain investors (mainly institutional and promoter groups) cannot sell their allotted shares post-listing.
- Purpose: Prevents immediate selling pressure and ensures price stability.
2. Categories of Lock-in Periods
- Anchor Investors: Typically have a 30-day lock-in period.
- Promoters & Pre-IPO Investors: Subject to 6-12 months lock-in.
- Employee & HNI Allottees: May have different conditions based on the IPO structure.
3. How Lock-in Period Affects GMP?
- Before Expiry: GMP remains stable if strong hands (FIIs, DIIs) hold shares.
- As Expiry Nears: GMP may decline if large investors plan to sell post-lock-in.
- Post Expiry: If heavy selling occurs, the stock price can drop, reducing GMP.
4. Case Study Examples
After lock in period , Many institution tries to sell their orders. This create a large supply of shares in market. Lock in period restrict this institution to sell their stocks.Upon expiration, the sudden increase in availability of additional shares can lead to increased supply, potentially affecting the stock's market price.
Case Study: Hyundai Motor India's IPO Lock-In Expiry
Hyundai Motor India had bought a record-breaking $3.3 billion IPO in October 2024, marking the largest in India's history. The company sold shares worth $989.4 million to institutional investors, including BlackRock and Fidelity.As the lock-in period for these shares kept them restricted to sell.After expiration approximately $32 billion worth of shares across 82 companies, including Hyundai Motor India, had become eligible for trading. This has created a huge supply of shares in market and still today it is trading below ipo listing price. However major investors didnt has sold their shares.
Historically, the expiration of lock-in periods has always led to increased market supply, which can affect stock prices.
Case study: SBI Cards
The expiration of an IPO lock-in period can lead to significant stock price declines if major investors decide to sell their shares. This phenomenon occurs because the sudden influx of shares increases supply, often outpacing demand, which drives the stock price down.
For instance, in the case of SBI Cards and Payment Services, after the lock-in period ended, the stock experienced a notable decline. The shares fell to ₹505, marking a 30% decrease from its issue price of ₹755 per share.
This example illustrates the potential impact of lock-in expirations on stock prices, highlighting the importance for investors to monitor such periods and assess the possible effects on their investments.
Sectoral GMP Trends
- Different industries exhibit varied GMP trends; tech and pharma often have higher premiums.
- Market cycles influence GMP trends across sectors.
Post-Listing GMP Impact
- After an IPO is listed, GMP trends often shift based on real-time demand and trading volumes.
- Stocks with strong fundamentals tend to sustain high post-listing prices.
Grey Market Manipulation
In Grey market there is also manipulation concern for investors.It can mislead investors or traders by inflated price. Here are some common tricks that is used to manipulate Grey Market Premium (GMP) and how investors can identify and protect themselves:
1. Artificial Demand Creation
- How It Works: Certain brokers or individuals create a false sense of high demand by circulating exaggerated GMP values through unofficial channels. Never follow such channels.
- Impact on Investors: Retail investors may rush to invest based on inflated GMP, and they turns into loss when the stock lists at a much lower price.
- Warning Signs: A sudden surge in GMP without a corresponding increase in IPO subscription figures.
2. Insider Trading and Information Asymmetry
- How It Works: Insiders or brokers who already has information of companies which are unpublished can trade shares of company for their profit only and making loss of investors.
- Impact on Investors: Retail traders without this privileged information end up making uninformed decisions.
3. Pump-and-Dump Strategy
- How It Works: Many times Operators push GMP very high by continuously buying in the grey market. When retail investors jump in, they offload shares at the peak, crashing the GMP.
- Impact on Investors: Those who buy at inflated GMP levels suffer heavy losses when the stock corrects after listing.
- Warning Signs: Unusually high GMP that suddenly collapses just before listing day.
4. False GMP Listings on Social Media and WhatsApp Groups
- How It Works: Groups circulate fake GMP figures to mislead investors into thinking an IPO is more popular than it is.
- Impact on Investors: They invest based on false data and end up disappointed when the IPO lists at a lower price.
- Warning Signs: GMP figures vary drastically across different sources; always verify from multiple trusted dealers.
5. Collusion Between Large Investors and Grey Market Dealers
- How It Works: Some large investors work with grey market dealers to manipulate GMP by placing coordinated buy/sell orders.
- Impact on Investors: Prices are artificially controlled, making retail investors buy at inflated rates.
- Warning Signs: Heavy volatility in GMP despite stable market sentiment.
6. Kostak Rate Manipulation
- How It Works: Some brokers manipulate Kostak rates by providing artificially high prices for IPO applications, creating the illusion of strong demand.
- Impact on Investors: Many retail investors sell their applications early and miss potential gains from a strong listing.
- Warning Signs: A very high Kostak rate relative to the GMP can indicate artificial demand creation.
7. Subject to Sauda Fraud
- How It Works: In "subject to sauda" deals, fraudulent dealers may refuse to honor payments if the IPO lists poorly.
- Impact on Investors: They may not receive the agreed amount even after a successful allotment.
- Warning Signs: Dealing with unknown or unreliable grey market intermediaries.
How to Protect Yourself from Manipulation
- Verify Information from Multiple Sources: Do not rely on a single GMP figure; check with multiple trusted sources.
- Look at Subscription Numbers: A high GMP with low IPO subscription numbers is a red flag.
- Follow SEBI Guidelines: Avoid grey market trading as it is unregulated and risky.
- Analyze Fundamentals: GMP is speculative; study the company's financials before investing.
Conclusion
Grey market is a speculative market. Here traders and investors come together to sell and buy shares of unlisted company. While premium depends largely on Market sentiments , if it is positive then Premium goes high nad those who get this shares enjoys profits. If Market sentiments is down, this shares get listed in discount below issue price. Investors should buy these shares after research and understanding market sentiment A prudent approach would be to focus on fundamental analysis rather than speculative price movements.