What is IPO Grey Market?

During the current rush of back-to-back IPOs, you must have heard/read the terms like Grey Market, GMP and Kostak. Let’s try to understand them one by one.

Overview of Grey Market:

In simple terms, it’s a parallel market where original goods of manufacturer are sold, but not through their authorized distribution channels.

In case of IPO grey market, IPO applications/shares of a company are traded unofficially even before that company’s listing. All transactions happen over-the-counter (OTC) in cash among small groups. These transactions and even the overall grey market is not regulated by SEBI or any other governing body and thus these transactions happen only on the basis of mutual trust.

Two types of trades take place in IPO grey market:

1. Trading of IPO shares before their listing on stock exchanges at a premium price called as GMP.
2. Trading of IPO applications at a premium price called as Kostak.

What’s Grey Market Premium/Price (GMP)?

Whenever new IPO opens for subscription, you will see this GMP term everywhere in the news. For recent CAMS IPO (read more), GMP is estimated at around Rs.315. So, how it’s calculated?

GMP is decided based on supply and demand. If an IPO gets overwhelming response by getting subscribed for more than 100%, then there are more people in grey market who want to buy that stock before it get listed and hence it will get more premium over its IPO price.

Let’s again take the example of CAMS IPO. As it got subscribed by almost 4700% at its IPO price of Rs.1230, people in grey market are ready to pay Rs.315 extra for each share i.e. Rs. (1230 + 315) = Rs.1545 per share before it get listed.

Between the time when allotment of shares is completed and listing is yet to happen, one can do an OTC transaction in grey market saying that I will transfer these shares to you at a fixed premium (GMP), regardless of what listing price it may get on exchanges.

One can play-safe here by performing transaction at fixed GMP, instead of taking risk in selling at listing price. There were cases of negative GMP also in the past, where shares are traded below the IPO price.

What is Kostak?

We saw in GMP that actual shares are traded before their listing. In same way, IPO application itself also got traded at a premium price called as Kostak.

In retail category, if IPO gets subscribed by more than 100%, then whatever number of applications you might have applied under same PAN number, you will get only 1 lot if you got lucky enough. Allocation algorithm treats each retail PAN number equally. So, people are willing to buy more IPO applications at premium to increase their chances of allotment. In this case, even if your sold IPO application doesn’t get any allotment, then also you will get the Kostak/premium amount.

To Summarize:

As mentioned earlier, Grey market is unofficial parallel market. It is used by traders to buy/sell IPO applications/shares before they get listed on stock exchanges. It is also used by companies, underwriters to test the waters and decide the valuation before launching an IPO.

Grey market transactions happen between small set of groups and it won’t be easy for normal investor to participate in them. There is also a legal aspect to it, as some countries don’t allow such trading. A retail investor can see at grey market prices to predict how the IPO stock might perform after its listing on exchanges.

Disclaimer: This information is only for educational purposes. Please consult your own financial advisor before investing.

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