IPO GMP, IPO Grey Market Premium, Kostak Rate, Subject to sauda (2024)

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IPO Grey market is an unofficial and informal market where the IPO shares are traded before they are officially listed on the stock exchange. IPO Grey Market is an unregulated and operated market, but its presence is important for every IPO as it gives potential investors an idea of the share market sentiment and demand for the IPO.

The premium price which an investor is willing to pay over and above the IPO issue price in the grey market is known as the Grey Market Premium. Kostak Rate or Subject to Sauda are the price at which IPO applications/lots are sold in Grey Market.

In this chapter, we will understand the basic concept of grey market trading and basic terms and strategies used in its dealing.

IPO Grey Market Premium Meaning

Grey Market Premium, commonly known as GMP, is the difference between the price at which IPO shares are traded in the grey market and the IPO issue price. For example, if the IPO issue price is Rs 850 and an investor is willing to pay an additional Rs 300 to get the IPO share. This means that the GMP of the IPO is Rs 300 per share.

IPO GMP helps predict listing prices. In the example above, investors anticipate a listing price of Rs 1,150 (IPO issue price plus GMP i.e 850 + 300). Although there is no guarantee that the IPO listing price will exactly match the GMP, the GMP is one of the most important indicators that generally help investors predict the IPO price and make an investment decision accordingly.

IPO Grey Market Dealers

Grey market traders are unauthorized individuals who buy/sell IPO shares on an unofficial market (over-the-counter market). In certain cases, the grey market dealers are also required to underwrite a certain % of the IPO.

Since the IPO grey market is an unregulated and unofficial market, you cannot find registered traders. You need to check with local dealers to see if they operate in the grey market and can help you find buyers/sellers for your transactions. You can also try posting a message on the IPO Grey Market discussion page of InvestorGain.com to check for any buyer/seller or any discussion.

Trading in Grey Market

Trading in the IPO grey market begins with the announcement of the IPO issue price until the shares are listed on the exchange. The following are some of the key features of IPO grey market trading:

• Unofficial and unregulated market.
• Trading in the grey market takes place usually via telephone calls.
• Settlement of trade happens only in cash, generally using services of Angadia.
• Transactions in the grey market are based on mutual trust.
• Round the clock market that works 24*7.
• No regulatory body governs IPO grey market trading.
• No official or registered dealers are involved.
• No formal contracts are issued for transactions conducted in the grey market.

Grey market trading usually involves three parties: the buyer, the seller, and the dealer. Grey market trading takes place either through the trading of IPO shares or IPO applications.

To trade in the grey market, as a very first step, an investor needs to find a grey market dealer. Since the grey market dealing happens solely on trust, the dealer builds clientele through references. Thus, an investor can start trading in the grey market when he is referred to a dealer through a good and reliable contact.

Once an investor finds the dealer, he can place the order over phone call. The trading in the grey market starts as soon as there is any news of an IPO in the market till the previous day of listing. The settlement happens on the listing day at 9.45 am. Once the listing takes place, the grey market window for the said IPO gets closed. There is also a 90 day expiry period for the grey market trades. If an IPO does not take place within 90 days from the grey market transaction date, the deal gets cancelled.

On the listing date, the dealers punch in their buy/sell order as per their net delivery position at equilibrium price.

The accounting of the trades is done using excel sheets or simple Tally tools. On the settlement day, the angadia goes door-to-door to recover/deliver cash as the case may be.

In case of any default by either of the counterparty, there is nothing anyone can do. Thus, trading in grey market is risky.

IPO Grey Market Rate Types

1. IPO Grey Market Premium (GMP)

The IPO GMP price can be positive or negative.

• If the GMP value is positive or very high, this indicates that the IPO may perform better on listing or bumper listing. Example: If the IPO issue price is Rs 500 and the GMP is Rs 150, the listing is likely to be at Rs 650 (30% gain).
• If the premium is low or negative, investors may be uncertain whether the stock will be successful after the listing and expect the listing to be at a discount. Example: If the IPO issue price is Rs 500 and the GMP is Rs - 200, the listing is expected at Rs 300.

Example of GMP with listing gain

If the IPO issue price is Rs 500 and the GMP is Rs 300. It means that buyer A in the grey market is willing to purchase the share at Rs 800.

Suppose an IPO applicant i.e. seller B of IPO shares in the Grey market has 15 shares. He has submitted an application of Rs 7,500 (15*500).

The grey market buyer A will pay Rs 12,000 (15 * 800) against the IPO application value of Rs 7,500 (15 * 500).

Now let us say if the listing happens at Rs 1,200, the buyer and seller will earn below profits:

• Profit for seller B of the IPO shares: Rs 4,500 (12,000-7,500)
• Profit for buyer A of the IPO shares: Rs 6,000 (18,000 - 12,000)

Example of GMP with listing loss

Continuing the above example, if the listing happens at Rs 600, the profit/loss for both parties will be as below :

As per the listing price of Rs 600, the application amount for 15 bids will be 15*600 = Rs 9,000.

Profit for seller B of the IPO shares: Rs 4,500 (12,000 - 7,500)

Loss for buyer A of the IPO shares: Rs 3,000 (9,000 - 12,000)

The amount of profit for the seller remains the same. However, the buyer incurs a loss of Rs 3,000 because the listing was below the GMP.

2. Kostak Rate

The IPO Kostak price is an agreed-upon price at which IPO applications are sold and purchased, regardless of their allotment status. The Kostak Price is the fixed price paid by the buyer of the IPO Application to the seller of the IPO Application.

The Kostak rate is the price for the entire IPO application and not per share. It is a price mutually agreed between the buyer and seller.

For example, an investor has applied for 15 shares at Rs 500 in an IPO amounting to Rs 7500. Now there is another investor who is bullish about this upcoming IPO and agrees to pay Rs 1,000 as the premium to purchase the entire IPO application. In this case, the seller of the IPO application secures a fixed profit of Rs 1,000 irrespective of whether he secures an allotment or not.

If the seller receives allotment and the listing happens at a premium, the seller is required to pass the listing gains to the buyer or credit the shares to the purchaser against Rs 8,500 (7,500 +1,000).

If the seller does not receive the allotment, still the buyer of the IPO application needs to pay Rs 1,000 to the seller of the IPO application.

3. Subject to sauda

Subject to Sauda price is an extension to the IPO Kostak rate. In subject to sauda, the buyer of the application agrees to pay a fixed price against the IPO application only if the seller of the IPO application receives allotment in the IPO. The subject-to-Sauda rates are generally higher than the Kostak rates.

Considering the above example, the buyer of the applicant agrees to pay an additional Rs 4,000 for the entire application provided the IPO applicant receives the allotment.

In this case, if the applicant secures no allotment, the deal gets cancelled. However, if the IPO applicant receives the allotment the buyer of the IPO application pays Rs 4,000 as the premium. The seller of the applicant either passes the listing gains to the seller or shares to the buyer of the IPO application for Rs 11,500 (7,500 + 4,000).

Note: Rs 7,500 is the amount for 15 shares bought at Rs 500. Rs 4000 is the premium buyer paid for the entire application.

Grey Market Trading Pros and Cons

Advantages

• Increases the chances of making a profit from the IPO.
• Availability of IPO shares for trading even before listing or subscription.
• Ability to purchase IPO shares even after the IPO subscription window closes.
• No limit on the number of IPO applications for trading.

Disadvantages

• A high amount of risk is involved as the market is unregulated.
• No grievance forum in case of any fraud or issues.
• Chances of losses in case of listing at a discount.
• No written or official agreement to buy or sell; hence no proof to serve.

Grey market premium is good or bad

Grey Market is beneficial if used in the right way. It is one of the indicators that help to predict the listing price. Grey Market can be used as an effective hedging tool and not for gambling. GMP is based on market sentiment and demand and supply of IPO shares and gives a fair idea of IPO listing.

Although the GMP is not always accurate, investors should keep an eye on the GMP as it can help them evaluate their investment decisions and the performance of an IPO on listing.

You can have a look at the IPO GMP live data or the IPO GMP performance tracker on Chittorgarh.com under the GMP tab of every IPO.

Page Glossary

Note: Angadia is an age-old traditional form of courier service that deals in transfer of valuable items like cash, jewellery, etc. Generally angadias are used for money transfer services. They are the informal intermediaries who deal in cash. Angadias play a very important role in Grey Market which operates on a cash basis. It is a very risky service and is based purely on trust. Angadias offer door step delivery for cash pickup or delivery.