What does IPO performance in the grey market indicate for listing?
Initial public offerings (IPOs) are the main route for a company to get listed and enjoy the opportunities offered on stock exchanges. However, before IPOs can get listed, companies’ equity shares are traded in the grey market which is unregulated by Sebi. Grey markets are seen as a medium to buy equity shares of a new company before they are officially listed on exchanges. Also, the proposed equity shares in an IPO are typically sold at a premium with price being determined by supply and demand, and can be quite volatile. Notably, transactions in the grey market are done in cash and in person. But what do IPOs’ performance in this unregulated market can mean for listing?
According to Krishna Raghavan, Dy. CEO, Unlistedkart, the performance of a company’s shares in the grey market can indicate the potential demand and interest in the stock once it is officially listed on a stock exchange.
Meanwhile, Manish Khanna Co-founder at Unlisted Assets said, generally, the share price performance of unlisted Pre IPO companies gets reflected through Grey Market Premium (GMP). The share may list at a premium if the GMP is high. Investors may be concerned about the performance of the share after listing if the premium is low or negative. One may readily predict how the stock could perform on the listing day by analysing its GMP.
Unlistedkart CEO explained that if the shares are trading at a premium in the grey market, it may indicate that there is strong demand for the stock and that investors believe it will perform well once it is officially listed. This can lead to high trading volume and a strong opening price when the stock is listed on the exchange.
That said, on the other hand, if the shares are trading at a discount or at a lower price than the IPO price in the grey market — this could indicate that there is less interest in the stock and that investors believe it may not perform well once it is officially listed. Raghavan added, “This can lead to lower trading volume and a weaker opening price when the stock is listed on the exchange.”
Thereby, Raghavan said, “It’s important to note that the grey market performance is not the only indicator of a stock’s potential performance once it’s officially listed, and it’s not a guarantee of future performance. Other factors such as the company’s fundamentals, industry trends, and overall market conditions also play a role in determining a stock’s performance.”
Last year, 40 Indian corporates raised ₹59,412 crore through main board IPOs, half of the ₹1,18,723 crore (all-time high) mobilized by 63 IPOs in 2021.
The year 2023 is likely to witness a healthy pipeline of IPOs.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Ganesh
http://ganesh@finplay.inFinance enthusiast, Mutual fund expert.