Know what Grey Market Premium (GMP) in IPO means?
During election season, news channels forecast outcomes after voting ends but before results are announced. These predictions vary and are often inaccurate, so exit polls cannot be relied on entirely.
This is quite similar to how the grey market premium (GMP) functions for IPOs. Like exit polls, GMP estimates potential listing gains before a stock officially debuts. However, just as with exit polls, these predictions aren’t always reliable.
You might still be wondering: how does the grey market premium actually operate? Who sets these prices? Let’s unpack these details step by step.
What is Grey Market Premium?
So, what exactly is a grey market premium? Before an IPO, stock is traded in an unofficial marketplace—known as the grey market. The price at which these shares trade over their issue price is referred to as the grey market premium.
For instance, if the issue price of a share is ₹150 and the GMP is ₹50, it suggests that buyers are ready to pay ₹200, expecting the stock to list at a premium. Remember, this is just speculation—not a sure thing.
When Does the Grey Market Start?
When does the grey market activity begin? Typically, it starts on the day the IPO’s price band is announced, which is usually 10-15 days before the subscription window opens. For example, when Tata Technologies announced its price band, the GMP surged immediately due to strong brand association.
Who Decides the GMP?
Who determines the GMP? Unlike the transparent pricing on stock exchanges, the grey market is unofficial and unregulated. As a result, GMP is driven purely by supply and demand, often influenced by major investors and brokers.
If an IPO attracts high demand, the GMP tends to rise. But if sentiment sours, the premium can drop sharply—sometimes overnight. It’s rather like trying to predict the outcome of a closely contested cricket match: there’s no definitive way to know the real odds.
Why Does GMP Change So Much?
You might ask, why does GMP fluctuate so much? It’s not unusual for the premium to be ₹250 one day and tumble to ₹100 the next. Factors like investor subscription, changing market sentiment, or fresh regulatory news can all cause these rapid shifts—sometimes on a daily or even hourly basis.
A significant change in GMP often happens when the IPO subscription window opens. Before this, it’s all speculation. Once subscriptions begin, the interest from large investors becomes clear. If they participate, GMP rises further; if they stay away, the premium can collapse—even to zero.
Take Go Fashion’s IPO as an example: its GMP was ₹300 before subscriptions opened. When high-net-worth individuals entered the market, the premium rose further. By contrast, LIC’s GMP ranged from ₹60 to ₹80 but fell to close to zero as demand faded before listing.
Kostak and Subject to Sauda
GMP isn’t the only rate that matters in the grey market. Two other terms to know are the Kostak rate and ‘subject to sauda’.
Kostak is the price paid for an entire IPO application, whether or not you get an allotment. For example, if the issue price is ₹100 and the lot size is 15 shares, you invest ₹1,500 per lot. If the Kostak price is ₹1,000, you get this amount just for applying, whether or not you receive shares.
If the seller receives the allotment and the listing happens at a premium, the seller has to pay the listing gain or the shares to the purchaser of the IPO application. And in return, the IPO application purchaser will have to pay back the 1000 Costec price and 1500 for that one lot of shares. Now, if the seller did not receive the allotment, the purchaser of the IPO application will still have to pay the 1000 rupees for that Costec price.
Then there’s ‘subject to sauda,’ which is an extension of the Kostak concept. Here, the buyer only pays if the seller actually receives an allotment. Because of this condition, subject to sauda rates are generally higher than Kostak rates.
For a similar example, let’s assume that the subject to the SADA price is rupees 3000. Now, in this case, if the seller receives the allotment and the listing happens at a premium, then the seller will receive 3000, subject to SADA, and 1500 for that application, in exchange for either the listing gains or the shares he receives in the allotment. But if the seller did not receive the allotment, no exchange of money occurs, and the deal is off the table.
Is GMP Trustworthy?
But the real question remains: can you trust GMP? Whenever the GMP is high, it’s natural to assume the stock will list at a premium. But how accurate is this assumption? Let’s look at some real examples.
The Tata Technologies IPO had a JMP of 475 rupees and opened strongly, validating predictions. The Naica IPO’s JMP was about 775 rupees with significant gains. It seems promising but then gets complicated.
In the case of the Car Trade IPO, the issue price was 1618, and the last JMP was 140. So, per this JMP, the listing should have happened in 1758. Instead, the stock opened at a discount of 1599.
Regarding the following example of Hyundai Motors, the issue price was 1960, and the last JMP was 62. So, the listing price ideally should have been set in 2022. But it actually happened in 1934, which means in both these cases, JMP was indicating a higher opening at a premium. But in both these cases, the stock is listed at a discount.
Swiggy’s IPO had an issue price of ₹390 and a zero GMP, but it listed at ₹420, showing GMP reflects market sentiment, not guarantees. Since GMP is unregulated, there’s no SEBI recourse, and transparency is limited; you must accept the broker’s quoted rate.
Key Takeaways
The key takeaways that you need to note are:
- First, never place complete faith in GMP. Use it only as a reference point to gauge market demand and supply for an IPO.
- Second, avoid selling your IPO applications in the grey market unless you fully understand the risks involved.
- Third, base your IPO investments on the underlying fundamentals of the company, not just market buzz.
So, next time you hear that the GMP for an IPO is ₹300 and someone urges you to apply, pause, do your own research, and make an informed decision.