Source: |Updated: Dec 03, 2021, 03:53 PM IST
When a company decides to release its IPO and wants to enter the share market they pre-release the IPO in the Grey market so that they can check whether people are interested or least interested.
The Grey market runs on word of mouth and buyers or sellers can come into their agreement which remains unregulated by Market authorities. Grey market is outside the jurisdiction of traditional trading hubs and runs as a parallel market.
In this article, you will read about the IPO Grey Market Premium & Grey Market in detail. Read till the end of the article to know more about the Grey market and its functioning.
Overview of IPO Grey Market Trading
IPO Grey Market Premium or IPO GMP is a premium a buyer ready to pay to the seller in order to buy an IPO. This entire process takes place in the grey market.
There are 2 types of ways through which you can deal with. In the first case scenario, you can buy shares of that particular IPO and sell the shares at increased rates.
As a seller, you might incur a loss or get a hefty profit which depends on the mood of the public investors after the IPO has been listed.
In a recent case, the Paytm IPO which was seeming to rise in the list has lost a huge number of shares, and that too in a matter of a month.
The second case scenario through which you can deal with IPOs in the Grey market is by selling the whole IPO application at an increased rate.
Here the buyer will only pay a certain amount if the seller gets the desired number of IPO shares as applied by the buyer and also the Tax on the IPO will be the liability of the Seller only.
Case Scenario 1: IPO shares trading in the Grey Market
Let’s assume you have applied for shares as an Investor for a certain IPO and you buy the shares at a certain amount.
However, there are a certain amount of risks when you have applied for the IPO as you may not get the desired number of shares when the IPO gets released or get the share at a lower price.
If you think that the share value will have more price than the issue price then you might want to collect them way before allotment.
This is where Grey Market comes into existence as you need to contact grey market dealers to purchase IPO before allotment with a certain premium which you have to pay to the seller and this is called the Grey market Premium.
Dealers usually contact the sellers to get the price of the shares and once they finalize the deal with the seller then you will be notified on a priority basis. If they receive the shares then they will transfer the shares to your DEMAT account.
Case Scenario 2: IPO applications trading in the Grey Market
Like IPO shares, IPO applications are also traded similarly in the Grey Market. If you are a buyer then you will have to consider a few factors before throwing a deal to the seller as you might have to pay a premium to the seller regardless of share price going down during the IPO allotment.
However, if the seller gets the allotment, only then you will give the premium and get the whole application. The whole operation takes place through Grey market dealers.
The seller will have to send the detailed form to the Grey Market dealer and by issuing a registrar the allotment is done to you. You can choose to get the shares in your DEMAT account or else you may direct the seller to sell the shares at a premium price.
In case no shares are allocated to the seller then the deal gets dismissed and the seller gets his premium as part of the deal.
Kostak rates and Subject to Sauda
In the case scenario where the seller sells the IPO application before the launch date and there seems to be an agreement where the premium promised by the Buyer has to be given to the seller.
This amount is known as the Kostak rate and the agreement is known as Subject to Sauda. In any case, the premium has to be given to the seller irrespective of whether he gets the allotment or not.
However, if he gets the allotment even an increased rate then according to Subject to Sauda he will have to transfer the shares to the Buyer in the Kostak rate only.
To know in detail about IPO Kostak Rates & Subject to Sauda, you can check Top10stockbroker.com.
Conclusion
The Grey Market can help you to make huge profits if you can sense the trend of IPO that is going to be released. The Grey Market is not an official platform and thus the IPO market and IPO grey market do not have any connection.
The IPO market is run by SEBI whereas the IPO grey market does not have any regulatory body as deals go by word of mouth. We should be more precautious while dealing I the grey market area as it can make you lose a huge chunk of your money.
