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What is GMP in IPO?
What is GMP in IPO?

Initial Public Offerings popularly known as IPOs is gaining traction all over the world especially in India. More than 300 IPOs were launched in India in 2024 alone and companies raised a staggering 1.8 lakh crore.
However, amid this IPO frenzy it is also important to make sure that you choose the right IPO whether it is a general IPO or an SME IPO and at the right price as there have been cases where some IPOs were issued with the primary purpose of giving venture capitalists a profitable exit and retailers lost significant money in those IPOs. This is where the grey market and the concept of GMP in IPO comes into play.
What is a grey market for stocks?
Grey market is not an alien concept, we have many prominent grey markets in India specializing in various products such as Nehru Place or Gaffar Market in Delhi for electronic goods and software. Grey market facilitates the buying and selling of goods, products and services via channels not authorized by law but are not illegal.
There is a grey market for IPOs also where shares and applications of those companies which are about to launch their IPOs are traded. The trading of these shares or applications for IPOs are done only in cash and in person. The transactions of the grey market are not authorized by the stock exchanges or market regulator SEBI.
How does the grey market for IPOs work?
The grey market works on the demand and supply model where the retail investors trade in shares of the companies which are about to get listed on the authorized stock exchanges such as the NSE and BSE. This market is run only by limited individuals, and it works on the basis of trust, and it is not regulated by authorities like SEBI, but trading done here is unofficial but legal.
However, when you buy the shares of an upcoming IPO, you can only sell it once the actual IPO is listed on authorized stock exchanges. Most of the trades in grey market are done through small paper chits and unofficial dealers.
This market gives an idea to the retail investors and the IPO issuers about the hype and anticipation for the IPO among investors. It also gives a fair indication to the underwriters of the IPO of the path of the company once it is listed.
Types of grey market trading
Grey market trading takes place in two ways:
- People buy and sell the shares of the company which is about to launch their IPO
- People trade in the applications of the upcoming IPO at specified rates or at premium.
What is GMP in IPO?
The share price in the grey market is determined on the basis of the data available and buzz around the IPO. If the company has sound financial strength, bright growth prospects and the supply is limited then in this case the share price is quoted at a premium over the allotment price. On the other hand, if there is weak demand or interest for the IPO of a company then the shares can also be sold at a discount.
For example, if the issue price of a share is INR 100 and the grey market price (GMP) for the share is INR 200, then it means that the investor is ready to pay even INR 300 for the share. The excess amount of INR 200 in the above case is known as the grey market premium.
GMP can be used as an indicator of the future performance of an IPO by retail investors. However, the GMP is not always the accurate indicator of the future response to an IPO as the grey market can be manipulated.
How are shares traded in grey market?
The process of buying and selling of IPO shares in the grey market is as follows:
There is a buyer who wants to buy the IPO shares on the allotment date.
Now comes the role of the seller who has already applied for the IPO at the listing price. The seller is asked by the dealer to sell the shares at a premium to the buyer at a premium if he is allotted the shares.
Although it is not sure if the seller will be allotted the shares on the listing days or not but irrespective of it, he is entitled to receive the premium.
Now, they give the details of the application to the dealer who further notifies the buyer.
On the listing days, if the seller is allotted the shares he may sell the shares at a premium in the grey market.
In case the seller is not allotted the shares, he still gets the premium and the loss is borne by the buyer.
Let’s understand it with example, Mr.A applies for IPO lots of an upcoming IPO which is priced at INR 100. Although he has applied for it but there is no guarantee if he will get the shares or not.
At the same time, there is another buyer called Mr.B who also wants to buy the IPO shares, but he wants to ensure that he gets the shares. So, he reaches out to the dealer in grey market who in turn approaches Mr.A offering him a premium of INR 20 per share over the IPO price of INR 100 he has applied for.
If Mr.A agrees then he will sell the shares in the grey market if he is allotted the IPO on listing day at a premium of INR 20 per share. However, if he is not allotted the shares on listing days, then if he takes the premium. Also, if on listing days, the shares are listed at a premium of over INR 20 per share then Mr.B will also earn the profit in this case.
What is Kostak Rate?
Not only shares, but even applications for IPO can be purchased in the grey market. GMP comes into play once the shares are traded unofficially traded in the grey market. But there are also instances when the investors want to trade in the applications for IPO itself. In addition to shares even the applications can also be traded at a rate known as Kostak rate. However, this rate relies on the allotment of the shares.
Conclusion
The grey market is beyond the realm of legal regulations, and hence, precautions are highly recommended. GMP, at times, may throw light on potential outcomes of an IPO, but it should not be looked at critically since the brighter prospects may not necessarily translate to success in the future.

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