A grey market, also known as a parallel market, is a place where goods are traded outside of the manufacturer’s legitimate channels of distribution.
Black and white are two ends of the same paradigm for many people living in this colourful world, with black representing all that is wrong and white representing all that is pure and correct. However, once you leave the fictional realm, “just” Black or White life is unthinkable. As a result, we eventually choose the grey road, which is the middle ground. Similarly, there are additional hues in the stock market, such as black, white, green, red, and even grey.
What is a Grey Market Initial Public Offering (IPO)?
The unofficial bidding and offering of a company’s shares is known as an IPO grey market. This occurs prior to the company issuing shares in an Initial Public Offering (IPO).
There are no rules and restrictions because this is an unofficial market. These transactions are not regulated by market regulators such as the Securities and Exchange Board of India (SEBI). This is also not supported by the regulator.
Grey markets are usually managed by a small group of people. Every transaction is built on mutual trust.
What is Grey Market Premium?
The price at which shares are exchanged in the grey market is known as the grey market premium.
Let’s say the initial public offering (IPO) price of stock X is Rs 200.
When the grey market premium is Rs 400, it suggests that investors are willing to pay Rs 600 for firm X’s shares (200+400).
This is how a typical grey market transaction goes down.
Let’s have a look at another example. Ashwin works as a stock market trader. In a future IPO, he has been assigned 500 shares at a specific issue price.
Meanwhile, other investors, known as ‘buyers,’ believe that the share’s worth is substantially higher than its issue price.
These purchasers are willing to pay a ‘premium’ for grey market shares. ‘Sellers’ are investors like Ashwin who are contacted by grey market dealers. They come to an agreement to sell the shares for a higher price (premium) than the issue price. If Ashwin likes the offer but doesn’t want to risk the stock’s listing, he sells his shares and takes the profit.
What is Kostak Rate?
The Kostak rate is the amount paid by an individual for an IPO application before it is listed on the stock exchange. One can fix their profit by buying and selling their entire IPO application on Kostak rates outside of the market. The Kostak tariffs apply regardless of how you receive your allotment. For example, if a person submitted 5 applications for an IPO and sold them for Rs. 2500 each, the IPO profit would be Rs 12500. However, even if he receives the allotment after two applications, his profit will remain the same. Furthermore, if he sells the stock that he got and makes a profit of roughly $25,000, he must give the remaining profit to the person who purchased the application.
Is Grey Market a part of the initial public offering (IPO) market?
The grey market is an unofficial market, whereas the IPO market is a SEBI-regulated and recognised channel for raising capital in the market. There is no official link between the IPO market and the IPO grey market.
What is Grey Market and how does it work?
There are two ways to make money in the grey market. The first option is to buy and sell IPO shares in the grey market before they are publicly traded. The second option is to sell your initial public offering application for a certain price.
You may also read about: What is DRHP and RHP?
Grey Market Trading of IPO Shares:
- IPOs allow investors to apply for shares. They face a financial risk since they may not be allotted any shares or may be allocated shares but the price of the shares may fall below the issue price. Sellers are the people that do this.
- There are a few people who believe the stock is worth more than it was when it was first issued. They begin collecting these shares even before the IPO allotment procedure is completed. Buyers are the people who do this.
- Buyers contact grey market dealers to make an order to purchase IPO shares at a particular premium.
- The dealer then contacts the sellers who applied for the IPO and asks whether they are willing to sell their IPO shares at a premium now.
- Meanwhile, if the sellers do not want to accept the risk of a stock market listing but still want to benefit, they might sell the IPO shares to a grey market dealer. The seller, on the other hand, must complete the transaction with the grey market dealer at a specific price.
- The dealer receives the application details from the seller and notifies the customer that he purchased a particular number of shares from the grey market sellers.
- The allocation has been completed, and sellers may or may not receive a share allotment.
- If the investor is allotted shares, he may receive a call from the dealer asking him to sell them at a specified price or transfer the shares to a Demat account.
- If the investor sells the shares, the settlement is based on the profit or loss as well as the grey market premium at which the buyers and sellers agreed.
- If the sellers are not assigned any shares, the agreement is cancelled without a settlement.
Trading Initial Public Offering (IPO) Applications in the Grey Market:
- Even IPO applications feature sellers and buyers, like IPO stock trading.
- The price of an application is set by buyers based on a variety of assumptions and market factors. They make the sellers an offer that they will buy an IPO Application for a specific premium.
- To be safe, sellers may sell their application to a buyer through a grey market dealer for a higher price.
- There is no need for the seller to be concerned about IPO share allotment. Even if he did not receive an allotment, he is entitled to the grey market premium he received when he sold his IPO allocation.
- The seller sends the dealer the detailed form. Furthermore, the dealer informs the buyer that he purchased an IPO application from sellers on the grey market at a specified price.
- The issuing registrar oversees allotment. An allocate
- on of shares may or may not be received by the application seller.
- If shares are allocated to the sold application, the dealer may contact either seller to request that the allocated shares be transferred to a Demat account or sold at a specific price.
- Settlement is based on profit or loss when selling shares.
- The sale is said to be over without a settlement if the sellers are not given any shares. However, because he sold his application, the seller keeps his premium.
You may also read about: 8 Factors to increase chances of IPO Allotment
If you can predict when an IPO will be released, the Grey Market can help you make a lot of money. Because the Grey Market is not an official platform, there is no relationship between the IPO market and the IPO grey market.
The IPO market is regulated by SEBI, however the IPO grey market is unregulated because deals are done by word of mouth. We should be more cautious while dealing with the grey market because it might cause you to lose a significant amount of money.