What is IPO Grey Market Premium (GMP)?

Q: What is IPO Grey Market Premium (GMP)? IPO Grey Market Premium (GMP) refers to the extra price at which shares of a company are being traded in an unofficial grey market before they are listed on the stock exchange. The GMP gives investors an idea of how the IPO might perform upon listing.

Example: If a company’s IPO price is ₹100 and its GMP is ₹50, the stock might list at ₹150 on the stock exchange.

Q: How is GMP calculated? GMP is simply the difference between the grey market price of the IPO and the issue price. It can fluctuate based on demand and supply, market sentiment, and the financial health of the company issuing the IPO.

Q: Can GMP be relied upon for predicting listing gains? While GMP can give an indication of investor sentiment, it is not always accurate. Many factors, including market conditions and company fundamentals, affect the actual listing price.

What are Kostak Rates?

Q: What are Kostak Rates? Kostak rate refers to the amount an investor gets by selling his/her IPO application in the grey market for a fixed price, regardless of whether they get the IPO allotment or not.

Example: If the Kostak rate for an IPO is ₹500 and an investor sells their application, they will get ₹500 irrespective of the allotment result.

Q: Why do investors sell their applications at Kostak rates? Some investors sell their IPO applications at Kostak rates to lock in profits, eliminating the risk of not getting the IPO allotment. It ensures they receive a fixed return regardless of the IPO’s final outcome.

Q: Is selling applications at Kostak rates legal? Selling applications in the grey market, including Kostak deals, is not officially regulated by SEBI. Hence, these transactions are conducted at the investor’s own risk, as they are not legally protected.

What is Subject to Sauda?

Q: What is Subject to Sauda in IPOs? Subject to Sauda is a grey market term used when an investor agrees to sell their IPO application if they receive the allotment. This rate is only applicable if the IPO allotment happens.

Example: If the Subject to Sauda rate is ₹3,000, and an investor gets the allotment, they will sell the shares to the buyer for ₹3,000 profit per application.

Q: How is Subject to Sauda different from Kostak? In Kostak, the seller gets a fixed amount irrespective of the allotment. In Subject to Sauda, the deal is valid only if the seller gets the IPO allotment. The potential profit in Subject to Sauda is usually higher, but it comes with the risk of not receiving the allotment.

Q: Can Subject to Sauda rates be trusted? Subject to Sauda, like other grey market activities, is unregulated. Therefore, there’s no formal assurance or protection in these deals. These transactions are based on trust and are carried out outside of official stock market operations.

Other Frequently Asked Questions

Q: Why do grey market and Kostak transactions exist if they are unregulated? Grey market and Kostak transactions exist because investors are eager to make early profits or reduce risks before the IPO listing. These markets function due to demand and supply dynamics, and investors participate to maximize their chances of profit.

Q: Can grey market trading affect the IPO’s actual listing price? No, grey market trading does not directly affect the IPO’s listing price on the stock exchange. The official listing price is determined by the response to the IPO during its subscription period, market conditions, and the company’s fundamentals.

Q: How can I participate in IPO grey market trading? Grey market trading is unregulated and carries significant risk. It is conducted by brokers or dealers who operate outside of SEBI’s regulations. Participation should be done with caution, as there are no legal protections for grey market transactions.

Disclaimer:

The concepts of IPO Grey Market Premium (GMP), Kostak rates, and Subject to Sauda are part of the unregulated grey market in India. These transactions are not endorsed or regulated by SEBI (Securities and Exchange Board of India), and investors participating in these deals do so at their own risk. Any profits or losses from such transactions are the sole responsibility of the individuals involved. It is always advisable to conduct thorough research and consult financial advisors before engaging in grey market activities.