The grey market is an
unofficial and unregulated market where securities, goods, or services are
traded. Here price manipulation is on very high level. But this trading is done
on legal platforms. In the filed of stock markets, grey market
transactions is done before a stock of any private company is officially listed
on an exchange to become public. This market gives a picture of sentiment of
investors that whether they are interested in subscribing the stock or not.
Grey market trading
provides early opportunities, or traders or investors to buy a stock before
listing on exchange.
What is the Grey Market and How Does it Work?
The grey market in India
is a informal platform for investors and traders to trade shares of an upcoming
IPO before its official listing. These trading is done on outside stock
exchanges and are not regulated by the Securities and Exchange Board of India
(SEBI), there is no legal protection for participants.
Grey Market Participants
In the grey
market, stocks of unlisted company are bought and sold before they are
officially listed on the stock exchange. However, the company itself do not
gets involved in these transactions. Here's how it works:
- Retail Investors:
After an IPO is announced by any company, retail investors bids to buy
shares in the grey market. They can bid by their broker account. Retail
Investors bid according to subscription status. They check premium and if
it shows positive, they bid to earn that premium after listing. Once
listed many retail trader sell their trades on the listing day.
- Stock Brokers:
These brokers facilitate transactions between buyers and sellers in the
grey market.This brokers act as middlemen who handle the buying and
selling of shares in an unofficial, off-exchange market.
How Shares Move in the Grey Market
- The shares which are being traded in the grey market
are typically not yet in the hands of the investors who
applied for the IPO. Rather, transferred through brokers
who have access to the IPO allotment process. In some cases, large
institutional investors may be involved in moving these shares.
- Once the IPO allotment is done, and shares are credited
to the accounts of those who applied, these investors may sell their
shares in exchanges.
Who Sets the Grey Market Price?
- Demand and Supply:
The price in the grey market is driven by the demand and supply of the
stock. If many people demand for the stock or bid at premium price, the
GMP will be high. If the sentiment is negative, the price may be low or
even negative.
- Market Sentiment:
Some times premium depends on Market sentiments. In India if Nifty is
trading in negative for months, listing of stock is negative.
Understanding the Grey Market in India
Grey markets are driven
by speculation. Traders and investors anticipate whether an IPO will be
successful or not based on GMP, overall market conditions, and company
fundamentals. However, the absence of regulatory oversight means grey market
trading is purely demand-driven and speculative.
Mechanism of Share Allotment Between Anchor Investor and Retail
Investor
Anchor Investors in IPOs
- Anchor investors are
mostly large institutional investors (such as mutual
funds, insurance companies, pension funds, etc.) who purchase shares of
unlisted company before it opens to the general public.
- Anchor investors make
a commit to buying a substantial portion of the IPO
shares, typically 30% of the total IPO size, through a process called
the Anchor Investor Allotment. This gives a positive
sentiments for listing of stock at premium.
Process of Anchor Investment:
- Pre-IPO Commitment:
Anchor investors are allowed to commit to purchasing shares in an
IPO before the official offering period opens for all
investors.They buy the shares at a predetermined price, which is
typically close to the issue price of the IPO.
- This allotment occurs one day before the IPO
opens for retail investors. However, their shares are subject to
a lock-in period (usually 30 days), during which they
cannot sell the shares once the stock lists on the exchange.
How Anchor Investors Get Shares:
- Allocation by the Company: There is difference between allotment of shares
between retail and institutions. These investors do not participate in the
same process as retail applicants. Generally retail can get their
allotment from their brokers and they have limit for lot size , mean
quantity of share they can buy. But anchor investors commit for big
portion and thieir allotment is done by company.
- The company sets aside a portion of the shares in the
IPO (usually 30%) specifically for these anchor investors.
- Price:
Anchor investors buy shares at a price set by the company, which is
typically disclosed in the red herring prospectus (RHP),
and this price can sometimes be at a slight discount to the final issue
price for retail investors.
Example of Anchor Investment:
- Zomato IPO (2021):
During Zomato’s IPO, anchor investors such as ICICI Prudential and SBI
Mutual Fund were allotted shares before the IPO opened for the
public. These anchor investors committed a large sum and were allocated a
significant portion of the IPO before retail investors had a chance to
apply.
Key Differences Between Anchor Investors and Retail Investors:
- Anchor investors are
institutional entities or large investors, while retail investors are
typically individuals applying through the public offer.
- Anchor investors can invest before the public
offering opens (even one day before) and are allotted shares
separately by the company, which they commit to buying.
- Retail investors only buy shares after the
allotment and only through brokers once the IPO
officially opens to the public.
Why Do Investors Buy Grey Market Stocks?
- Early investment opportunity
before the official listing.
- Potential to earn a premium if
the IPO gets high demand.
- Gauge market sentiment based on
Grey Market Premium (GMP).
What is Grey Market Premium (GMP)?
GMP is the price above
the issue price. Issue price is fixed by Company. If the share priice in grey
market is trading above issue price then it is refer is premium over issue
price GMP is an indicator of market sentiment toward the IPO and is calculated
as:
\[ GMP = Grey Market
Price - IPO Issue Price \]
For example, if an share
of company is issued at INR 500 and the grey market trading price is INR 600,
then the GMP is INR 100. A positive GMP indicates high demand, while a negative
GMP suggests weak investor interest.
Factors Affecting GMP
IPO Subscription Demand: Higher the demand, higher the GMP.
Market Conditions: A bullish market leads to a higher GMP.
Company Reputation: Established brands get higher GMPs.
Sector
Performance: A booming sector results
in a strong grey market interest.
IPO Grey Market Dealers
Grey market dealers are
intermediaries who connect buyers and sellers for unofficial share
transactions. These dealers operate informally and are known only through
word-of-mouth networks. Grey market dealers are usually unregistered brokers or
intermediaries who facilitate the buying and selling of shares in the grey
market. They are not officially regulated by stock exchanges,
so their operations are informal and exist outside of the official trading
platforms.
Trading in the Grey
Market
Grey market trading
involves buying IPO shares at an unofficial rate before the stock is officially
listed. This allows traders to profit from anticipated price movements, but it
also carries significant risks.
Risks Involved
Regulatory Risk: No SEBI oversight. Their is no control over
speculation and guarantee of share credit.
Counterparty Risk: There is no legal trade agreements is done
during buy and sell.
Price Manipulation: GMP can be speculated. Price is in hand of
seller only. There is no authorize platform where you can compare with real
price.
Liquidity Risk: Unregulated transactions may lead to defaults.
Means if you got shares, you cant sell it.
How to Calculate Grey Market Premium?
If the IPO price is INR
200, and in the grey market, the stock is trading at INR 250:
- GMP = INR 250 - INR
200 = INR 50.
- If an investor has 100
shares, the expected profit before listing = 100 * INR 50 = INR 5000.
IPO Grey Market Rate Types
1. GMP with Listing
Gain: If GMP remains
high and stable, the stock is likely to list above its IPO price.
2. GMP with Listing
Loss: A declining or
negative GMP indicates weak demand and a potential listing below the issue
price.
3. Kostak Rate: This represents the price at which an investor
can sell their IPO application before allotment.
4. Subject to Sauda: This is a conditional deal where an IPO
application is sold only if shares are allotted.
Understanding Kostak Rate
It refers to the price at
which an individual or an investor can sell the
"right" to apply for an IPO to another investor before the
IPO is listed on the stock exchange.
In simpler terms: If the Kostak rate is 100 for a particular
IPO, you can sell the right to apply for that IPO to someone
else for 100, and that person will then apply for the shares on your behalf. It
is just like a getting a receipt for a IPO application. If you didnt get
allotment , atleast you will get that money which seller has committed.
Example of Kostak Rate
- An investor applies
for an IPO at INR 1 lakh.
- A buyer in the grey
market offers INR 10,000 as a Kostak rate.
- Even if no shares are
allotted, the investor still earns INR 10,000.
Subject to Sauda Explained
Unlike the Kostak rate,
subject to sauda is an agreement where the buyer pays only if shares are
allotted to the seller. If the seller does not receive any allotment, the deal
is canceled.
Historical GMP Trends
Let us consider
previous Grey Market Premium (GMP) trends, that can help us understand
its influence on IPO listing prices and investor sentiment. Let’s break down
these trends:
1. Historical GMP Impact on Listing Prices
- Positive GMP (Bullish Sentiment): A high GMP in stock indicates that the market is
expecting strong listing gains. If GMP is 10-30% or more above the issue
price, it often correlates with an opening day price above the offer
price. For example:
- Zomato (2021):
The IPO of zomato in 2021 had got listed on exchange. It had a GMP of
around 60% before listing, and it listed at a premium price of
approximately 50% higher than its issue price.
- Nykaa (2021):
Nykaa had a GMP of 50-60%, and it also listed at a significant premium,
which reflected strong market confidence in the company’s growth
potential.
- Negative or Low GMP (Bearish Sentiment): A low or negative GMP suggests a lack of confidence
in the stock’s post-listing performance. Historically, such IPOs tend to
have weak listings or, in worst cases, list below the issue price.
- Dish TV (2007):
The GMP before listing was negative, and the stock listed at a discount
to the offer price.
- Jet Airways (2014):
During its IPO in 2014, Jet Airways had a very low GMP, signaling weak
market confidence. It faced challenging market conditions, and its stock
listed flat with little to no premium.
2. GMP and Investor Sentiment
- Indicator of Market Sentiment: GMP is often viewed as a reflection of investor
sentiment. When markets are doing well, investors are more willing to pay
a premium for IPOs in the grey market. During bullish phases, you might
see a higher GMP for tech or new-age companies.
- Recent Performance of the IPO Market: If a series of IPOs have seen strong listing
performances, it raises investor expectations, thus driving up GMP for new
IPOs. For example:
- 2020-2021 Boom:
During this period, numerous IPOs had high GMPs (e.g., IRCTC, SBI
Cards, Route Mobile), creating a sense of FOMO (fear of
missing out) among retail investors, thus inflating GMP.
- Market Correction or Volatility: when the market is in a correction or faces sudden
volatility (e.g., a crash or political instability), GMPs get decreases or
go negative. This happened in 2018 and during the COVID-19 crash in 2020,
when many IPOs either had flat GMPs or low premiums.
3. Influence of GMP on Subscription Numbers
- GMP Drives Subscription Levels: A high GMP can increase demand during the IPO
subscription phase. Investors anticipate profits post-listing, leading to
higher applications and potentially oversubscription.
- Example:
The SBI Cards IPO in 2020 had strong GMP and became
oversubscribed by over 25 times, reflecting the high investor confidence
driven by the grey market.
4. Sector-Specific Trends
- Tech and New-Economy Stocks: Historically, tech and fintech IPOs have enjoyed
higher GMP due to their growth potential and investor appetite. For
instance, IPOs like Zomato, Nykaa, and Policybazaar saw
high premiums in the grey market because investors anticipated strong
growth.
- Traditional Businesses: On the other hand, traditional or less exciting IPOs
(like some in the manufacturing or infrastructure sectors) typically see
lower GMPs, as the market has lower expectations for their listing
performance.
Institutional Investor Influence on GMP
Anchor investors and
QIBs play a significant role in GMP trends. Higher institutional investor
participation usually results in a stable GMP.
1. Anchor Investors and QIB Participation
- Large institutional investors like mutual funds, FIIs,
and domestic institutions often subscribe to IPOs at the anchor stage.
- Their involvement boosts confidence in the IPO,
increasing demand and, consequently, the GMP.
- If QIB participation is low, it may negatively impact
GMP.
2. How GMP Reacts to Institutional Interest
- If major institutions aggressively subscribe, GMP may
rise significantly before listing.
- If demand is weak, GMP can fall even if the retail
segment remains interested.
3. Lock-in Period and GMP Volatility
- Institutional investors typically have a lock-in period
(30-90 days for anchor investors).
- Once the lock-in expires, selling pressure may lead to
GMP fluctuations.
4. Foreign Institutional Investors (FIIs) vs. Domestic
Institutions (DIIs)
- Strong FII participation often signals global investor
confidence, leading to higher GMP.
- DII participation is more stable but may not cause
significant GMP spikes.
IPO Lock-in Period Impact on GMP
The IPO Lock-in
Period can significantly impact Grey Market Premium (GMP) and
post-listing price stability. Here are key aspects to consider:
1. Understanding IPO Lock-in Period
- Definition: A
lock-in period is the duration during which certain investors (mainly
institutional and promoter groups) cannot sell their allotted shares
post-listing.
- Purpose: Prevents
immediate selling pressure and ensures price stability.
2. Categories of Lock-in Periods
- Anchor Investors: Typically
have a 30-day lock-in period.
- Promoters & Pre-IPO Investors: Subject to 6-12 months lock-in.
- Employee & HNI Allottees: May have different conditions based on the IPO
structure.
3. How Lock-in Period Affects GMP?
- Before Expiry: GMP
remains stable if strong hands (FIIs, DIIs) hold shares.
- As Expiry Nears: GMP
may decline if large investors plan to sell post-lock-in.
- Post Expiry: If
heavy selling occurs, the stock price can drop, reducing GMP.
4. Case Study Examples
After lock in period ,
Many institution tries to sell their orders. This create a large supply of
shares in market. Lock in period restrict this institution to sell their
stocks.Upon expiration, the sudden increase in availability of additional
shares can lead to increased supply, potentially affecting the stock's market
price.
Case Study: Hyundai
Motor India's IPO Lock-In Expiry
Hyundai Motor India had
bought a record-breaking $3.3 billion IPO in October 2024, marking the largest
in India's history. The company sold shares worth $989.4 million to
institutional investors, including BlackRock and Fidelity.As the lock-in period
for these shares kept them restricted to sell.After expiration approximately
$32 billion worth of shares across 82 companies, including Hyundai Motor India,
had become eligible for trading. This has created a huge supply of shares in
market and still today it is trading below ipo listing price. However major
investors didnt has sold their shares.
Historically, the
expiration of lock-in periods has always led to increased market supply, which
can affect stock prices.
Case study: SBI Cards
The expiration of an IPO
lock-in period can lead to significant stock price declines if major investors
decide to sell their shares. This phenomenon occurs because the sudden influx
of shares increases supply, often outpacing demand, which drives the stock
price down.
For instance, in the
case of SBI Cards and Payment Services, after the lock-in period ended, the
stock experienced a notable decline. The shares fell to ₹505, marking a 30%
decrease from its issue price of ₹755 per share.
This example illustrates
the potential impact of lock-in expirations on stock prices, highlighting the
importance for investors to monitor such periods and assess the possible
effects on their investments.
How IPO Size and Pricing
Affect Grey Market Premium (GMP)
The IPO size and
issue price have a direct impact on Grey Market Premium (GMP).
Smaller IPOs with attractive pricing often show higher GMP due to limited share
availability and higher expected demand. In contrast, larger IPOs or those
with overvalued pricing tend to have weaker GMP signals.
👉 Always compare
the IPO price band with peer companies in the same sector to check if the
valuation is justified.
Grey Market Premium
(GMP) vs Subscription Numbers – What’s More Reliable?
While GMP gives early
market sentiment, it can be unofficial and speculative. In
comparison, subscription data, especially from Qualified
Institutional Buyers (QIBs) and High Net-Worth Individuals
(HNIs), reflects real investor confidence.
✅ Tip: If GMP is high
but QIB and HNI response is weak, be cautious. Strong GMP and strong
institutional interest is a more reliable signal.
Should You Apply for an
IPO Based on GMP Alone?
No – never apply based
only on Grey Market Premium (GMP). It is an unregulated, unofficial indicator and
can be manipulated. Use it only as a secondary factor, after
checking the company’s financials, sector, and overall market mood.
🛑 High GMP with
poor fundamentals = red flag
✅ Moderate GMP with strong fundamentals = better risk-reward ratio
Track GMP Trends to
Understand Market Sentiment
Don’t just look at today’s
GMP number. Monitor the GMP trend over time:
- Is it consistently rising? → Positive sentiment
- Is it falling closer to listing? → Caution: sentiment
is weakening
- Is it volatile? → Possible manipulation or mixed views
📌 Tracking
GMP trends gives better insight into market mood than a single-day
snapshot.
Link Between GMP,
Company Fundamentals, and Sector Performance
Grey Market Premium
(GMP) tends to reflect expectations of listing gains based on company
fundamentals and sector performance. If the IPO belongs to
a booming sector (like defense, EV, or fintech) and the company shows strong
revenue growth, GMP is more trustworthy.
✅ Always match GMP with:
- Revenue & profit trends
- Industry outlook
- Competitive edge of the company
Sectoral GMP Trends
- Different industries
exhibit varied GMP trends; tech and pharma often have higher premiums.
- Market cycles
influence GMP trends across sectors.
Post-Listing GMP Impact
- After an IPO is
listed, GMP trends often shift based on real-time demand and trading volumes.
- Stocks with strong
fundamentals tend to sustain high post-listing prices.
Grey Market Manipulation
In Grey market there is
also manipulation concern for investors.It can mislead investors or traders by
inflated price. Here are some common tricks that is used to manipulate Grey
Market Premium (GMP) and how investors can identify and protect themselves:
1. Artificial Demand Creation
- How It Works: Certain
brokers or individuals create a false sense of high demand by circulating
exaggerated GMP values through unofficial channels. Never follow such
channels.
- Impact on Investors: Retail
investors may rush to invest based on inflated GMP, and they turns into
loss when the stock lists at a much lower price.
- Warning Signs: A
sudden surge in GMP without a corresponding increase in IPO subscription
figures.
2. Insider Trading and Information Asymmetry
- How It Works: Insiders
or brokers who already has information of companies which are unpublished
can trade shares of company for their profit only and making loss of
investors.
- Impact on Investors: Retail
traders without this privileged information end up making uninformed
decisions.
3. Pump-and-Dump Strategy
- How It Works: Many
times Operators push GMP very high by continuously buying in the grey
market. When retail investors jump in, they offload shares at the
peak, crashing the GMP.
- Impact on Investors: Those
who buy at inflated GMP levels suffer heavy losses when the stock corrects
after listing.
- Warning Signs: Unusually
high GMP that suddenly collapses just before listing day.
4. False GMP Listings on Social Media and WhatsApp Groups
- How It Works: Groups
circulate fake GMP figures to mislead investors into thinking an IPO is
more popular than it is.
- Impact on Investors: They
invest based on false data and end up disappointed when the IPO lists at a
lower price.
- Warning Signs: GMP
figures vary drastically across different sources; always verify from
multiple trusted dealers.
5. Collusion Between Large Investors and Grey Market Dealers
- How It Works: Some
large investors work with grey market dealers to manipulate GMP by placing
coordinated buy/sell orders.
- Impact on Investors: Prices
are artificially controlled, making retail investors buy at inflated
rates.
- Warning Signs: Heavy
volatility in GMP despite stable market sentiment.
6. Kostak Rate Manipulation
- How It Works: Some
brokers manipulate Kostak rates by providing artificially high prices for
IPO applications, creating the illusion of strong demand.
- Impact on Investors: Many
retail investors sell their applications early and miss potential gains
from a strong listing.
- Warning Signs: A
very high Kostak rate relative to the GMP can indicate artificial demand
creation.
7. Subject to Sauda Fraud
- How It Works: In
"subject to sauda" deals, fraudulent dealers may refuse to honor
payments if the IPO lists poorly.
- Impact on Investors: They
may not receive the agreed amount even after a successful allotment.
- Warning Signs: Dealing
with unknown or unreliable grey market intermediaries.
How to Protect Yourself from Manipulation
- Verify Information from Multiple Sources: Do not rely on a single GMP figure; check with
multiple trusted sources.
- Look at Subscription Numbers: A high GMP with low IPO subscription numbers is a
red flag.
- Follow SEBI Guidelines: Avoid grey market trading as it is unregulated
and risky.
- Analyze Fundamentals: GMP
is speculative; study the company's financials before investing.
Should You Trust Grey Market Premium (GMP) for IPO Investing?
Grey Market Premium (GMP) is a useful but unofficial tool. It
reflects early investor sentiment but should never replace thorough analysis.
Use it in combination with:
- IPO pricing and size
- Subscription numbers
- Company fundamentals and sector
strength
- GMP trend analysis
🔎 Final advice: Be cautious. Apply for IPOs with
strong fundamentals and only use GMP as a supporting indicator – not the main
reason to invest.
Disclaimer:
The information provided in this article is for educational
and informational purposes only. Grey Market Premium (GMP) is unofficial,
unregulated, and may not reflect the actual listing performance of an IPO.
Investors are advised to do their own research and consult with
a financial advisor before making any investment decisions. The
author or website will not be responsible for any profit or loss
arising from investment decisions based on this article.
Sources
What is GreyMarketPremium- Angel One
What is Grey Market Price- Business Standard