IPO Grey Market is an informal market in which IPO applications and shares can be bought and sold before they are officially made available for trading on the stock-exchange.
This is an over-the-counter market where dealers can place orders and support new issues for their customers before they actually issue them.
Notice: The IPO Grey Market is an unofficial, over-the-counter marketplace. There are no regulations. All transactions must be done in cash and on a personal basis. These transactions are not supported by SEBI, Stock Exchange, or Brokers.
Grey market trading includes:
Grey market trading involves a small group of people who are trustworthy and can trade without any official rules or platform.
Two terms that are very popular in the IPO grey market include 'Grey Market Premium’ and 'Kostak'.
1.Grey Market Premium, a premium paid in rupees to Grey Market for IPO shares before they become listed on the stock exchange, is a premium of Rs. Grey market premiums may be either positive or negative, depending on the stock's supply and demand.
Grey Market Premiums can also be attached with the words "Buyer" or "Seller". These indicate the price at which buyers will buy shares and the price at which sellers will sell shares.
Example: Mundra Port and SEZ Limited
Issue price: Rs. 440 per equity shares
Grey Market Premium: Rs. 400 (Buyers).
Mundra Port shares are now available for purchase at Rs 440+400 = Rs. 840.
Issue price: Rs 45 per equity shares
Grey Market Premium: Rs. -6 (Seller).
SVPCL shares are available for sale at a discount of Rs 6. 45-6 = Rs 39
2. Kostak is the premium amount of rupees at which IPO application are traded on the IPO Grey Market. Usually, the 'Kostak value' is the premium for a maximum number of retail applications in an IPO.
Kostak price is crucial before the issue is close for subscription. Only a few IPO applications are traded once final bidding status has been established.
'Kostak' is for those people who aren't willing to take the risk of IPO allotment or listing gains.
BGR Energy Limited
Issue Price: Rs. 480/ Equity Share (at the upper band).
Lot Size: 14
Grey Market Premium: Rs 350 - Rs 360
Kostak (Rs 10000): Rs 2500 - Rs 2600
BGR applications worth Rs 1 lakh are traded on the IPO Grey Market at Rs 2500 - Rs 2600
The Grey Market Premium for this IPO is approximately 75% of issue price. However, the 'Kostak" is only 5%. Grey Market traders assume that there will be a high number of applicants and no firm allocation for those who apply full Rs 1 lakhs. They assume that one in two people will be allotted and therefore Rs 2 lakh investment will yield them approximately Rs 5000 return. They are now ready to purchase 1 lakh applications for Rs 2500.