What is IPO GMP?

Understanding How the IPO Grey Market Works

The grey market, sometimes called the parallel market, is an informal platform where shares and IPO applications are bought and sold before they're officially listed on stock exchanges like the NSE or BSE. Unlike regulated markets, the grey market operates without oversight from SEBI or any stock exchange, making it unofficial in nature.

Trading in this market typically happens offline, in person, and in cash. There are no written contracts—transactions are based on mutual trust. Despite its informal nature, the grey market plays a significant role in gauging market sentiment around upcoming IPO.

When investors miss the application window or want early access to an IPO, the grey market gives them a route to still participate.

Likewise, it allows sellers to exit their applications before allotment.

This market may also help observers form an early opinion on whether a new listing is likely to see heavy demand or tepid interest once it hits the exchanges.
 

What is Grey Market Premium (GMP)?

IPO GMP, or Grey Market Premium, is the extra amount investors are willing to pay for a company's shares in the grey market over and above the IPO issue price.

A rising GMP typically signals strong demand and optimism that the stock will list at a premium. Conversely, a falling or negative GMP might suggest that investors expect a flat or discounted listing.

However, it's important to remember that GMP is only an indicator—it’s not backed by any official data or guarantees. The actual listing price can be influenced by various other factors such as market conditions, investor appetite, or company fundamentals.
 

How to Calculate the Grey Market Premium (GMP)?

GMP is calculated using a simple formula:

Grey Market Premium (GMP) = Grey Market Price – IPO Issue Price

This straightforward difference tells you how much extra investors are paying in the unofficial market compared to the actual offer price of the IPO.

To illustrate, if a company sets its IPO price at ₹700 per share, and the same stock is being bought and sold unofficially in the grey market at ₹850, then the GMP is ₹150. This difference reflects how bullish investors are about the IPO’s potential listing performance.
 

What is a Grey Market Stock?

A grey market stock is essentially a share of a company that is being bought or sold unofficially before it’s listed on the stock exchange. These are typically shares of companies that are about to go public but haven’t started trading officially.

Since these stocks are traded outside the formal ecosystem, they are not backed by exchanges or regulated by SEBI. Transactions are informal and typically carried out based on verbal agreements. This means there is no legal recourse in case the deal goes sour, which naturally increases the risk involved.
 

How are IPO Shares Traded in the Grey Market?

The IPO grey market functions independently from SEBI and recognised exchanges. It operates through a small network of dealers and investors who connect informally to buy or sell IPO applications or promised shares.

Here’s how it typically works:

Let’s say Mr. X has applied for IPO shares through the official route. Another investor, Mr. Y, is keen on owning shares of the same company but doesn’t want to rely on the uncertainty of allotment. So, Mr. Y contacts a grey market dealer to secure shares in advance.

The dealer then connects Mr. Y with Mr. X. They strike a deal where Mr. Y agrees to pay Mr. X a fixed premium—say ₹10 per share—if Mr. X is allotted shares. This premium is paid regardless of what price the stock eventually lists at.

If Mr. X gets the allotment, he is obliged to sell those shares to Mr. Y at the IPO price plus ₹10. This way, Mr. X earns a fixed profit per share, while Mr. Y gets guaranteed access to the IPO shares.

Deals like these are carried out in cash and are largely dependent on trust, as they aren’t governed by any legal framework.
 

What is Kostak Rate in the IPO Grey Market?

Kostak Rate refers to the price at which an investor sells their IPO application in the grey market, regardless of whether shares are allotted. For example, if the Kostak Rate is ₹500, the seller will receive ₹500 just for applying—even if no shares are allotted.

Subject to Sauda, on the other hand, is a deal that only holds if the IPO application is allotted. In this case, the buyer pays a fixed amount only if the shares are successfully allocated to the seller. It's a way for investors to gain confirmed shares before listing, but the payment is conditional on allotment.

These rates fluctuate based on demand, subscription figures, and investor interest, and are often used by traders to hedge or speculate ahead of a listing.
 

Different Types of Trading in the Grey Market

In the context of IPOs, grey market trading generally involves two activities:

Trading IPO shares pre-listing: Investors can buy or sell IPO shares before the company officially lists its shares on the stock exchanges. This allows traders to speculate on the performance of the stock based on early interest or market sentiment. If demand for the IPO is high, the price in the grey market could be higher than the offer price, reflecting a premium (the Grey Market Premium, or GMP). If interest is low, the grey market price might be below the offer price.

Trading IPO applications: Investors can also trade IPO application forms in the grey market, sometimes at a premium or discount based on the anticipated success of the IPO. This allows individuals who may have missed the opportunity to apply for the IPO in the official market to still gain exposure by purchasing application forms from others willing to sell them.
 

Risks and Challenges in Grey Market Trading

Before diving into grey market trading, it’s important to understand what it involves and why it carries significant risk.
As mentioned earlier, grey market transactions are not governed by SEBI or any exchange. They’re based purely on trust. Since there’s no legal framework to protect either party, disputes can’t be resolved formally. A trader might back out, delay payment, or fail to transfer shares—and there’s little recourse in such cases.

Here are a few challenges associated with grey market trading:

• Lack of regulation: No legal protections if something goes wrong.
• High counterparty risk: Transactions are informal and rely on personal trust.
• Market manipulation: GMP and Kostak rates can be artificially inflated to lure investors.
• Cash-only dealings: Payments are often made in cash, making them harder to track or verify.
• No guarantee of listing success: A high GMP doesn't ensure strong listing-day performance.
• Overvaluation Risk: Relying solely on grey market premiums can lead to overestimating an IPO's value.

While the grey market may give early indicators about demand and help in assessing IPO performance expectations, it comes with substantial uncertainty. Investors should weigh these risks carefully.
 

Conclusion

Though the IPO grey market isn't part of the official system, it often stirs up a lot of interest before a company gets listed. The Grey Market Premium (GMP) can give a rough idea of how people are reacting to an upcoming IPO—but it’s far from a sure thing. Deals here, including those based on Kostak Rate or Subject to Sauda, happen informally and without any regulatory safety net.

That makes it a risky space to engage in. There’s no paperwork, no legal backing—just trust between parties. So while the grey market may offer early clues, it’s not the place for blind bets.