Grey Market In India: Everything You Need To Know

Grey Market In India: Everything You Need To Know

What is the Grey Market?

Grey Market IPO is an unofficial market in which individuals buy and sell IPO shares or applications before they are officially available for trading on the stock exchange. There are no rules governing this unofficial over-the-counter market. Everything is done on a one-to-one basis using cash. Third-party firms such as SEBI, Stock Exchanges, or Brokers are not involved in such transactions.

Traders in the grey market make unauthorized offers and bids on the company’s stock. When a company’s equity is offered to traders after the IPO date and price band announcements, it is referred to as grey market stock. Since there is no official platform or set of rules for grey market trade, it is done within a small group of people. ‘Grey Market Premium’ and ‘Kostak’ are two popular words used in the IPO grey market.

What is the Grey Market Premium?

The premium amount at which the grey market IPO shares are exchanged is known as the grey market premium (GMP). The IPO GMP is determined by taking into account the demand for a company’s share that is about to go public. 

In the unregulated market, the grey market starts informally as soon as the IPO date and price band are published. Although this may vary based on the market, demand, and volume of subscriptions, investors always take the premium into account before making an IPO investment. The IPO’s potential response on the day of listing is reflected in the GMP. 

What is the Kostak Rate?

The premium amount at which the grey market IPO shares are exchanged is known as the grey market premium (GMP). The IPO GMP is determined by taking into account the demand for a company’s share that is about to go public. 

In the unregulated market, the grey market starts informally as soon as the IPO date and price band are published. Although this may vary based on the market, demand, and volume of subscriptions, investors always take the premium into account before making an IPO investment. The IPO’s potential response on the day of listing is reflected in the GMP. 

What is Subject to Sauda?

The Grey market includes a “Subject to Sauda” clause in addition to the Kostak rate, which is the price at which an investor purchases IPO shares. The agreement will only be deemed enforceable if the buyer receives the allocation during the listing process, as stated in the subject to sauda clause. When an investor purchases IPOs before their listing on a stock exchange, this is referred to as sauda. 

Furthermore, according to subject to sauda clause, if the buyer is not selected for the IPO listing, they are under no obligation to pay the Kostak Rate for the IPO application that they have purchased from the seller. Sauda has a direct link to the grey market premium at the time of an IPO share trade.

Types of Trading in Grey Market

There are two ways to trade in the grey market before their listing on the stock exchange:

  1. Buy or sell IPO shares on the grey market
  2. Buy or sell your IPO application at a certain price

How does Grey Market work?

  1. IPOs allow investors to apply for shares. They face a financial risk since they may not be assigned any shares or they may be allocated shares but the shares may trade at a price lesser than the issue price. They are known as sellers.
  2. Few people think the share is worth more than what it was originally issued for. Even before the shares are distributed via the IPO allotment procedure, they begin to accumulate them. They are known as buyers.
  3. Buyers place orders to purchase IPO shares at a specific premium through grey market dealers.
  4. The dealer then gets in touch with the sellers who submitted applications for the IPO and asks them if they would be ready to sell their shares for a premium.
  5. In the meantime, the sellers may sell the IPO shares to a grey market dealer and book the profit if they prefer the premium and are unwilling to take on the risk of a stock market listing. The seller and the grey market dealer must, however, agree on a final price.
  6. Once the dealer has obtained the seller’s application details, he notifies the buyer that he has purchased a specific quantity of shares from the sellers on the black market.
  7. Sellers may or may not receive a share allotment after the allocation is complete.
  8. If the investor receives shares, he may transfer the shares to a Demat account or receive a call from the dealer requesting that he sell them at a specific price.
  9. If the investor is selling the shares, the settlement is completed based on the gain or loss and the price that buyers and sellers agreed upon on the grey market.
  10. If the sellers are not allotted shares, the transaction is canceled without any payment.

Conclusion

We can conclude that the performance of the stock in the grey market is a good indicator of how it will perform on the public market. In India, it is legal and unofficial to trade in shares in the grey market. With a grey market IPO, a lot of people and companies that are releasing an IPO are successful.