Why do IPO shares trade in the grey market? Read here

What is the purpose of the grey market?

Krishna Raghavan, Dy. CEO, of Unlistedkart explains that the purpose of the grey market is to provide a way for investors to buy and sell shares of a company before they are officially listed on a stock exchange. This can be useful for investors who want to get in on a new company or IPO early before the shares are widely available to the public.

Also, this market serves as a way for traders to speculate on the potential success of a company and make a profit by buying shares at the IPO price and reselling them at a higher price in the grey market. Backers usually believe that the shares will be in high demand when they are officially listed on the stock exchange.

How are IPO shares traded in the grey market?

Unlistedkart CEO explains that the grey market refers to the trading of shares of a company before they are officially listed on a stock exchange. This trading typically takes place through informal channels, such as over-the-counter transactions or through online forums, and is not regulated by any official exchange. The prices in the grey market are determined by supply and demand and can be quite volatile. Trading in grey market stocks in India is done in cash and in person.

Currently, Kostak and Grey Market Premium are the two well-known terms in the Initial Public Offering (IPO) Grey Market.

In India, Raghavan added that “the grey market for shares of a company is active during the Initial Public Offer (IPO) period. The shares are typically sold at a premium, with the price being determined by the demand and the perceived value of the company. It’s important to note that investing in the grey market carries a high degree of risk as the shares are not backed by any regulatory body and there is no guarantee of return.”

Generally, a small set of individuals run the grey market stock, and the deals are based on the mutual trust of individuals. He said,” the trading done in the grey market stocks in India is legal and unofficial.”

Furthermore, Raghavan said, “Traders and investors who believe that a stock has the potential to list at high valuations usually trade in grey markets. It is an excellent money-making opportunity as you can buy shares at a discounted price. Investors who have missed the application deadline for an IPO can directly apply for shares from the grey market.”

As per Prime Database, in 2022, 85 companies filed their offer document with SEBI for approval, in comparison to 128 last year. On the other hand, 27 companies looking to raise nearly ₹37,000 crore let their approval lapse in 2022, and 7 companies looking to raise ₹4,200 crore withdrew their offer document.

Pranav Haldea, Managing Director, PRIME Database Group on the outlook for 2023, said, “the pipeline continues to remain strong. 54 companies proposing to raise a huge ₹84,000 crore are presently holding SEBI approval. Another 33 companies looking to raise about ₹57,000 crore are awaiting SEBI approval (Out of these 87 companies, 8 are NATCs which are looking to raise roughly ₹29,000 crore).”

Haldea added, “the momentum seen in the last 2 months of 2022 is likely to continue, at least for the smaller-sized IPOs. However, it may be a while before we see larger sized deals, especially in light of lack of sustained interest from FPIs.”

In 2022, 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.

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