Grey Market IPO and its Terminology

Published by Sharekhan Education | December 4, 2020

Grey Mareket IPO and its Terminology

A grey market IPO is an unofficial market where the buyers and sellers buy or sell either IPO shares or applications before the shares get listed on the stock exchanges. These unofficial transactions are neither regulated nor transacted through the market regulator-SEBI, stock exchanges, or brokers. Two vocabularies are common to grey market IPO, which are:
1. Grey Market Premium
2. Kostak rates

Grey market premium:

It is the premium above the IPO price at which IPO shares trade in the unofficial market. These are off-market transactions. The grey market premium is an indication or a pre-cursor to the possible listing price of the IPO on the exchange. For example, let’s say the IPO gets offered at Rs.1000 per share. The IPO’s grey market premium is Rs.500 per share. It means that there is a high likelihood that the IPO shares will get listed near to Rs.1500 per share, on the exchange, on the day of the official listing. Although one cannot solely depend on this method to gauge the listing price, it has turned out to be a good indicator in the past.

Kostak rate:

Kostak rate is the fixed-rate at which a buyer can buy the IPO application before the IPO shares are officially listed. For example, if an individual applied for 3 IPO applications and sold the same at Rs. 1000 per application, he would fix his profit at Rs.3000; this will be immaterial of how many allotments he receives. Even if he received an allotment in only one application, his profit gets fixed at Rs.3000.  Suppose the person who received the shares sells them for Rs. 10,000 on listing day. Now he needs to share the extra profit of (Rs.10,000-RS.3000) Rs.7000 with the buyer. In this case, the buyer gained more than the seller. On the other hand, if the seller sells at a lower price, they stand to gain more

However, we would like to highlight that the grey market premium is subject to heavy manipulation by operators and retail investors tend to lose heavily in such deals. Hence we do not suggest the retail investors either enter into the IPO grey market or use them as an indicator for their success or failure of an IPO. An investor should always invest in a fundamentally sound IPO and avoid such a grey market.

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