IPO Grey Market Premium

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IPO Grey Market Premium or IPO GMP is an unofficial premium amount that the grey market is willing to pay on top of the opening or listing price of the stock of the company that has launched its IPO on the Indian Stock Market. The whole concept is based on Supply and Demand.

Behind the strictly SEBI regulated Indian Stock Market, there is an unofficial and illegal grey market where stock prices are quoted and traded among different investors. Based on the supply, demand and the potential of the to-be listed company, an IPO Grey Market Premium is quoted. This price keeps on varying until the IPO actually opens up at a specific listing price.

IPO Grey Market Premium Meaning

Here are some quick facts about IPO Grey Market Premium that you must know before you try your hand in this area if you choose to do so.

  • Major IPO Grey Market Premium trading happens in mainline IPOs only.
  • If any order is left without squaring off before the IPO opens, then the shares are squared off at the listing price of the stock (which is then termed as the settlement price).
  • There is no brokerage involved in IPO Grey Market Premium trades and all the orders are placed at the Net Price.
  • IPO Grey Market Premium or even Grey Market as a whole is not regulated by any Indian Stock Market or financial body. In fact, it is illegal and unofficial by all means. There is a set punishment under the Indian Law if you are caught trading in the grey market.
  • Since it is an unofficial market, it is prone to all kinds of manipulations. In fact, it has been rumoured at times that specific companies who are listing their IPOs get involved in the grey market in order to fabricate the IPO Grey Market Premium and change market perceptions.
  • IPO Grey market majorly runs in bigger cities such as Mumbai, Delhi, Ahmedabad, Surat, Indore, Jaipur etc.

IPO Grey Market Premium Example

Let’s take an example:

For instance, if the upper price band of the IPO of a company named ADB is ₹375 and IPO Grey Market Premium is ₹75. Then, the unofficial price of this particular IPO will be set as ₹(375+75) or ₹450. 

You can buy or sell in the grey market at any given point in time and you have the choice to square off your trade when you want (before the IPO gets listed).

Although it is a “grey” market, it is still a market nonetheless. Thus, to operate this market, there are specific dealers who assist in buying and selling of different shares among traders. There is nothing official about this buying or selling.

And obviously, there will not be any tax involved either. That is why it entices a specific set of people who are looking to make a quick buck (or lose a buck too).

Some traders look at IPO Grey Market Premium as a benchmark or a potential indicator of the actual performance of the IPO when it opens up. This helps such traders to take a call on whether to go ahead with the IPO or not.

Another difference between IPO Grey market and the official stock market is that you can buy or sell any quantity of shares as per your preferences in a lot. There is no limitation on the maximum purchase you can make, like what happens with the ₹15,000 max cap per lot.

Furthermore, there is no limitation of the total IPO investment either, which in case of regular IPO bidding is placed at ₹2 Lakh for a retail investor.


IPO Grey Market Premium for Investors

Have you ever bought a movie or a cricket match ticket in “black“? We have not honestly 🙂.

The black market movie ticket price tells you whether the movie is a hit or a flop. Although, for a flop movie, there are no black tickets since there are limited buyers for normal tickets in the first place.

Similarly, the IPO Grey Market Premium, the traders have an opportunity to buy shares before they get listed on the stock market. The trader can exit the stock by selling it through the IPO grey market premium.

Furthermore, the IPO grey market premium allows you to buy more shares than you would normally get through the IPO application.


IPO Grey Market Premium for Companies

The companies use IPO grey market premium to understand the IPO’s demand and supply stability. This helps the underwriting team in gauging the potential performance of the IPO once it gets listed on the stock market.

A lot of times, it’s the underwriters who start selling the IPO shares through the Grey Market and set the momentum of the IPO.


IPO Grey Market Premium Kostak Price

Then there is a concept of Kostak Price which basically is the monetary value of the IPO application. This IPO application can be traded in the grey market at a specific price based on various factors. This price is called Kostak Price.

Suppose you placed a bid for an upcoming IPO worth the whole retail limit of ₹2 Lakh and the Kostak Price of an IPO application is running at ₹3000. Then, you can trade your application and get a profit of ₹3000 by taking that Kostak price. This price varies on a regular basis and it all depends on when you would like to take it (if you choose to do so).

In that case, the potential profit you book (list price – issue price) will be taken up by the buyer of your IPO application. However, if you do not get any allocation in the IPO, the profit of ₹3000 stays with you.

The general process of shares crediting into your demat account and transactions happening through your trading account stays the same.

Having said that, with the kind of oversubscriptions happening these days on different IPOs (good or bad), the concept of Kostak Price is seeing a backdoor.

This is happening for the simple reason that investors know that there is a limited possibility of actually getting an allocation, especially if the IPO is really good and can bring quick returns.


IPO Subject to Allocation

There is also another concept of ‘Subject to Allocation’ which, as the name suggests, works only if shares are allocated to you after IPO opening. The rates, in this case, are much higher than what is provided in Kostak Shares while the rest of the process and details remain the same.

One major aspect that you must understand is that be it Kostak or Subject to allocation, in case you get shares allocated, the selling of these shares is going to happen through your trading account. And this is why you will be the one who is going to end up paying the Short Term Capital Tax. Thus, do your maths accordingly and calculate your final take away based on that.

This is important to know since without including STCT int consideration, you might end up getting really low profits or maybe no profits through all these trades.


Before concluding this article on the IPO Grey Market Premium topic, we would like to mention that this is something that a retail trader or investor should generally avoid.

Yes, there could be instances when one can make a quick buck here and there, but at the end of the day, this is something illegal and the money involved in black in nature.

Thus, be wary of these facts before you land yourself in this market.

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