What are IPO Gray Market Premiums? All about GMP

 

If you invest in IPO then you must have heard the name of GMP. In today's time, a lot of money is invested by retail investors in IPO. Also most of the retail investors decide whether to invest in IPO or not on the basis of IPO Grey Market Premium.



But most of the investors are not aware of what is IPO GMP (What is GMP in IPO). Today we will talk about IPO GMP in this article which will include what is IPO GMP, calculation of GMP, how GMP works and what is cost rate and subject to deal.

GMP Meaning

Talking about GMP meaning, its full form is Gray Market Premium. Thus, in simple words, gray market premium means how much premium is running in the gray market of an IPO share.

What is IPO GMP (What is Gray Market Premium in English)

Before listing in the stock market through IPO, the shares of that company are traded in the gray market. It is on the basis of this trading that the IPO gray market premium comes out.

GMP is the price that the buyer has to pay over the issue price of a share. If one share of IPO has come with an issue price of ₹100. If the GMP of this stock is running at ₹ 10, then the buyer will have to pay ₹ 110 to buy it in the gray market.

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The gray market premium is always one share. This GMP gives investors an idea whether the shares will be listed well or not.

What does the word gray mean in Gray Market Premium?

Legally, the shares of a company are traded only in the primary market and secondary market, which are traded through the stock exchange.

The shares issued in IPO come under the primary market whereas after the shares are listed, they are traded in the secondary market on the stock exchange. The trading which takes place before the primary market and secondary market is called gray market.

In gray market premium, the word gray indicates unofficial. This means that GMP is not a valid market term. Both primary market and secondary market are regulated by SEBI whereas gray market is not.



How does GMP work?

IPO gray market is an unofficial market where IPO applications or shares are bought and sold before official trading in the stock market.

  1. Investors apply in IPO for allotment of shares of a company through IPO. During this, investors take on financial risk. The first risk is that no shares are allotted to him. Second, if the shares are allotted but they get listed below the issue price. Let us call these types of investors as sellers.
  2. Apart from these types of investors, there are some individuals who think that the value of the shares of the IPO is more than the issue price and the shares will be listed at a good price. In this hope, such investors start buying shares through gray market dealers even before the IPO allotment takes place. These are called buyers.
  3. These buyers approach the gray market dealers and ask them to place their order at a fixed premium.
  4. Gray market dealers approach investors who applied for an IPO and are ready to sell their applications in the gray market. The dealer offers them the premium which is quoted by the buyer. (If IPO allotment is received)
  5. If the seller likes the offer and wants to avoid the risk of share listing, he sells his IPO application to the buyer through a gray market dealer.
  6. This deal is between buyer and seller but gray market dealer is the middleman.
  7. The gray market dealer takes the information about the IPO application from the seller and informs the buyer that he has booked the deal at the specified price.
  8. The shares may or may not be allotted to the seller (actual IPO holder) after the allotment is completed. If the shares are not allotted, then the agreement between the buyer and the seller stands cancelled.
  9. If the shares are allotted to the investor, the buyer can ask the seller to sell the shares at a certain price through the dealer. Alternatively, he can also ask him to transfer the shares to the buyer.
  10. After the shares are sold, the settlement of both the parties is done by the dealer.
It is worth noting here that in the gray market the shares are made in mutual trust and trust of the dealer. If a party goes back on its promise, then no legal action can be taken against it.

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IPO Gray Market Premium Calculation

The GMP of any IPO is never constant. Gray market premium shares change continuously until listing. Let us understand IPO GMP with the help of an example –

Suppose a new IPO is launched whose issue price is ₹ 100. If the GMP of this IPO is running at ₹ 50, then this share will be traded in the gray market at ₹ 150 per share (₹ 100 + ₹ 50). The amount of gray market premium depends on the demand and supply of the stock. If the demand for shares of the IPO has increased over a period of time, then its GMP will also increase.

IPO GMP Calculation Example :-

Sanjeev who has applied for IPO for 15 shares at the rate of ₹1,000 per share. The gray market premium of this IPO is running at ₹ 400. Sanjeev sold his shares for ₹ 1400 per share (₹ 1000 + ₹ 400) through a gray market dealer to cut the listing risk. This IPO application was bought by Manoj.

Here Sanjeev who is the seller has fixed a profit of ₹6,000 (15×400) if he gets the allotment.

Here Manoj has made a profit of ₹6,000 in the first case and a loss of ₹3,000 in the second case. But Sanjeev who sold his IPO application didn't mind the listing. He has made a profit of ₹6,000 in his one lot.

 Case – 1Case – 2
number of shares1515
Cost for one share for Manoj₹1400₹1400
Total Cost (Buyer)₹21,000₹21,000
Listing per share₹1,800₹1,200
total selling price(₹1,800 × 15) = 27,000(₹1,200 × 15) = 18,000
profit or loss to the buyer₹6,000(₹3,000)

Is GMP Legal?

Since gray market is an unofficial market. Because of this, there are no rules and regulations for this. The gray market is not tracked by anyone in an official way. Since there are no rules, SEBI does not take any responsibility for such transactions.

Gray market operations are done by some people with mutual consent.

Thus gray market is not illegal but due to no regulation it can be called unregulated.

Why is Grey Market Trading done?

With the arrival of any new IPO, trading starts in the gray market. But the question arises that why shares are traded in the gray market?

The main objective of trading in the gray market is to make maximum profit by guessing the listing of the company's shares. If an investor feels that the value of the company's stock is going to increase in the future, then he buys the shares even before they are listed on the stock exchange.

On the other hand, such investors who do not want to bear the risk after the shares are listed, they exit by selling the shares in the gray market before the listing.

Due to IPO shares being traded in the gray market, investors who have not been able to apply for IPO due to any reason can also buy shares. Additionally, investors who are more optimistic about the future of the company trade in the IPO gray market to buy more shares.

Underwriters also get information about the valuation of the company through gray market trading. Based on the gray market, underwriters get an idea of ​​the demand for the company's stocks.


Who decides the GMP?

Just as the price of a share is decided, in the same way the GMP of a share is also decided. If the subscription of an IPO is high, then its GMP will also be high. Similarly, GMP may remain low if the subscription is low. The demand for a stock in the gray market determines its GMP.

Let us see an example to understand this –

Suppose Ravi applied for IPO of 30 shares at the rate of ₹ 500 per share. This IPO saw huge subscriptions. At this time the company's GMP was running at ₹ 100.

Kishan (buyer) offered Ravi to buy his IPO application. Ravi wants to sell his shares in gray market but he demanded a premium of ₹ 150 per share.

Kishan inquired for a premium of ₹100 through all the dealers but none are ready to sell their shares below the premium of ₹150. Thus the demand for the stock is high but the supply is low, due to which the GMP of the stock will increase.

Can there be negative gray market premiums?

An IPO can have a positive gray market premium as well as a negative GMP. If the price of one share of an IPO is ₹ 100 and the trend of that IPO in the market is falling. Because of this, sellers in the gray market are selling more of that IPO. In such a situation, you will get these shares for less than the issue price in the gray market.

The shares are selling below the issue price which means that the shares are trading at negative GMP.

What is Kostak Rate

Like the IPO gray market premium, another term is the cost rate. When an investor applies in an IPO but he does not want to take shares in the IPO, that is, he does not want to take the risk by subscribing the shares. In this situation, he can sell his IPO application in the gray market at a cost rate.

If Ram applied one lot in ABC IPO for ₹15,000. At that time the cost of this IPO is running at ₹ 500 per lot. Ram wants to sell his IPO application before allotment. He sells his application to Shyam for ₹ 500 through a dealer.

Right now, whether Ram is allotted shares in the IPO or not, Ram will get ₹ 500. Whereas in Grey Market Premium deals, if the shares are not allotted, the deal gets canceled. Ram will have to transfer or sell the shares whenever Shyam says.

Here investors like Shyam book applications from many such persons. If he has booked 20 applications and gets five applications, he will recover his cost provided the shares are listed at a good price.

In this entire process, only ₹ 500 earned by Ram is called the cost rate. Cost per lot is per lot. The cost rate varies from IPO to IPO. In Costak deals, the seller gets the fixed cost amount. The same buyer is entitled to the profit and loss on the shares.

What is Subject to Sauda

Subject to deal is also the form of a parenthesis rate. In Subject to Sauda you have placed an IPO application and you sell it to any person in Subject to Sauda for ₹ 1500 per lot. If you are allotted IPO then that person will give you ₹ 1500.

 

In this type of deal, the deal is valid only after the allotment of shares in the IPO is done. That is to say, if you are allotted shares in the IPO, then only the buyer will pay the subject to deal amount. If there is no allotment, the deal gets cancelled. Whereas whether there is an allotment in the cost rate or not, the cost rate is paid by the buyer.

GMP Risk Factors

The biggest risk of the gray market is that there are no regulators.

All trades in the gray market are oral and are not written anywhere. There is no option to go anywhere later if any party reneged on its promise. In the absence of a regulator, even SEBI cannot do anything in these matters.

Gray market premiums are not reliable. Even if a dealer tells you IPO gray market premium or a website tells GMP, there is always a question on the credibility of all these.

Are there any taxes on selling IPO applications in the gray market?

Most of the investors who sell their IPO applications in the gray market do not even know that they have to pay tax on the gray market transactions. In these deals, the investor has to pay STCG (Short Term Capital Gains Tax) at the rate of 15% on the actual profit.

This example will tell you how much real profit you are left with after selling the application in gray market?

Suppose you IPO 150 shares of Zomato for ₹ 100. You sold your IPO application at a cost of Rs 2500.

Luckily you got the IPO allotment. You sold the stock of Zomato for ₹ 30,000 (150×200) at the behest of the buyer. Thus you got a profit of ₹15,000 (30,000-15,000) in your books.

You kept ₹2500 for yourself out of profit of ₹15000 and returned ₹12,500 back to the gray market dealer. Now the tax in this transaction will be as follows –

You made a profit of ₹15,000 out of which ₹2,500 is a profit. But you will have to pay tax only on the entire ₹15,000.

You have to pay STCG of ₹ 2250 (₹15,000×15%). You have got the actual profit only of ₹ 250 (2500-2250).

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Should you watch GMP?

Whether you should look at gray market premium as an investor or not depends on the tenure of your investment. You are applying for IPO listing gain or for long-term.

As such, GMP has nothing to do with the fundamentals of a stock. But it definitely increases the buzz of the stock, which increases the chances of the shares getting listed at a good price.

If you just want to apply for listing gain then you can track the gray market premium. GMP gives you an idea whether the listing of the stock will be good or not. But if you are thinking of investing in IPO shares for a long time, then you do not need to pay attention to things like GMP, subscription figure, cost, etc. For this, you should see the fundamentals of the company, strength of the company etc.

How to sell and buy IPO applications in the gray market?

Gray market is an unofficial market. Therefore, no official person or business is related to the gray market. If you want to buy and sell your IPO stocks in the gray market then you need to find a local broker. By engaging this dealer as an intermediary, you can buy and sell gray market shares. The job of this dealer is to reconcile the buyer and seller.

Conclusion -What is GMP in IPO

GMP is a good indicator to find out the demand for an IPO. However, due to the nature of gray market premium, the possibility of manipulation is very high.

As a conscious investor, you need to consider all the aspects before investing in any IPO.

Friends, today you have understood through this article what is IPO Gray Market Premium, what are the cost rates. If you liked this information, then please do share this post with your friends.

FAQ :

What is the full form of GMP?

The full form of GMP is Gray Market Premium.

Can GMP be considered reliable?

In the absence of regulation, gray market premiums are not reliable. There is also no guarantee that you will get GMP value on IPO listing.

How to sell IPO in gray market?

There are no platforms to sell IPOs in the gray market. If you want to sell your IPO in the gray market, then you have to contact a local broker.

Where to check IPO GMP?

You can check IPO GMP from the website of ipocentral and Chittorgarh.