If you invest in IPOs in India (2023), you would have heard the term IPO Grey Market and Grey Market Premium (or GMP) in IPO.
- What is Grey Market Premium in IPO?
- Why are many IPO investors so eager to find out the latest GMP of new IPOs?
- What does GMP in IPO Grey Market mean and whether one should rely on GMP before investing in IPOs?
Let’s discuss IPO Grey Market Premiums to better understand this concept and whether it’s of any use.
What is Grey Market Premium?
First, understand what is a grey market.
The GREY market is an unofficial, over-the-counter, unregulated market where shares/applications are traded between individuals (of a small group of individuals/HNIs) without the use of any exchange or recognized regulated routes. This is not regulated by SEBI and hence, is referred to as a grey market.
IPO Grey Market Premium or IPO GMP is the premium which people in IPO grey markets are willing to pay for shares of a company about to list on the stock exchanges via IPO soon.
Let’s take 2 examples to understand it better
- Suppose a company has come up with an IPO of Rs 500 per share. Now Grey Market Premium (GMP) of the shares in grey markets is Rs 100. So this is a situation of positive GMP. This means that buyers in the grey market are willing to purchase shares of this company at a premium (of Rs 125). That is, they are ready to pay Rs 500 + Rs 125 = Rs 625 per share.
- Suppose another company has announced its IPO at Rs 1000 per share. Now Grey Market Premium (GMP) of the shares in the grey markets is Rs -50. So this is a situation of negative GMP. This means that buyers in the grey market are willing to purchase shares of this company at a discount (of Rs 50). That is, they are ready to pay Rs 1000 – Rs 50 = Rs 950 per share.
Mind you, these GMP or premiums are not constant and keep changing daily to the changing demands. And these fluctuations will continue till the stock is listed on the exchange post IPO. So you might want to check the IPO GMP Live status of the IPOs you are interested in investing in.
Also, there is no connection between the official IPO market and IPO grey markets.
So why is GMP eagerly tracked these days?
In fact, if you check business papers and online publications, even these have started publishing IPO GMPs of the latest issues.
The reason is that IPO GMP indicates the premium that grey market operators are willing to pay for shares before IPO listing. So it is often used as an indicator to forecast the possible listing price of an IPO.
To be fair, many times listing gains/losses of many IPOs are in line with what grey markets indicate. But it’s not always the case. Many times, grey markets can get it wrong. Some IPOs in past had low grey market premium but listed with high gains and then went on to move even higher. On the other hand, many IPOs with high GMPs listed at a discount.
So never make the mistake of relying blindly on grey market premium to decide whether to invest in an IPO or not. GMP of upcoming IPOs will fluctuate a lot as the IPO date gets closer.
Since SEBI or brokers aren’t involved in this, there is no legal recourse to either buyer or seller in case of any issues. And since it’s a small market with a limited number of participants (mostly HNIs), there is always a possibility of GMP being manipulated to lure small investors into applying for IPOs by just looking at high GMPs.
Related Reading – Why do IPOs come in Bull Markets and are Overpriced?
That was about IPO GMPs. There is another term that you might come across in IPO grey markets – Kostak Rate. This is the rate at which one can sell their IPO application for a fixed price, irrespective of whether you get an IPO allotment or not.
So that was all about What is the Grey Market Premium (GMP) in IPOs in India (2023).