Grey market premium – what is it and where is it coming from

• A metric called grey market premium is popular with investors and traders – who try to predict if an IPO will provide them with listing gains or not.
  
• Google search trends show an increase in interest in ‘GMP’ during popular IPOs like LIC, Paytm, and Zomato, to name a few.
  
• But what exactly is grey market premium and how does it work?
  

Before subscribing to an IPO, investors are now checking for grey market premiums or GMPs in addition to analyst recommendations and draft red herring prospectus (DRHPs).

Over the years, grey market premium has become a key metric to assess if an unlisted stock can provide the listing gains that most people hope for.

If you are wondering what exactly the grey market premium is and how it is determined, here’s a simple explainer.

What is grey market premium?

In simple terms, GMP is the amount of money at which shares trade in the grey market before being listed on the stock exchanges.

It is an indicator of how the shares might react on the listing day.

Here’s an example to explain this:

A company launches an initial public offering (IPO) and fixes an issue price of ₹100 per share. The grey market premium is ₹20 per share. This means that in the unofficial market, the expectations are that the stock will list at a price of around ₹120.

Investors who think an IPO is undervalued can buy the shares in unofficial markets at the predetermined prices, while sellers can book profits by selling above the issue price.

GMP, like stock prices, can change every day as per many factors just like an actual stock.

How is the grey market premium calculated?

Grey market premium is decided based on the demand and valuation of the stock. If there is high demand for a stock or the market sentiment is that the valuation is fair or inexpensive, then the grey market premium will be on the higher side. This suggests that the stock may get listed above its issue price.

Inversely, if the demand is low or the market sentiment is that the valuation is expensive, then the grey market premium can be low, zero or in the negative. If the GMP is negative, it suggests that the stock may get listed below its issue price.

Another factor that also impacts grey market premiums is the market sentiment – a bullish market has a positive influence on premiums, while a bearish market can dampen them.

It is worth pointing out that grey market premiums fluctuate and are just indicative. They are not a definite proof of how the stock will perform when it lists on the stock market.

What is a grey market for an IPO?

Grey markets are parallel secondary markets and work outside of the regulated stock exchanges. Grey markets have existed for a long time and have been known by different names like curb trading and ‘dabba’ trading.

A grey market for an IPO is an unofficial market. Participants place bids and offers on shares of companies before they are issued in an initial public offering (IPO).

These grey markets are run by operators or ‘brokers’ who mediate between buyers and sellers for a commission. These markets are also where the grey market premium is estimated, based on factors like demand and the valuation of the company, among others.

“Grey markets are generally run by a small set of individuals. All deals are based on mutual trust,” according to Edelweiss.

Who decides the grey market premium?

Grey market premium is determined by several factors like the demand and supply for a particular company’s stock, the market sentiments, the valuations of the company, its financial metrics and future prospects.

Since the buyers and sellers in the unlisted space remain anonymous, it is difficult to suggest any single party or factor as the one deciding the grey market premium. It is a function of multiple factors and parties.

Some of the people who sell shares in unlisted markets include employees who sell their vested employee stock ownership plan (ESOPs), and private clients who were allotted shares by the company before the IPO.

How to trade in the grey market?

Grey market trading, also known as ‘Dabba’ trading, requires the buyer and seller to be connected by a mediator or broker. These brokers are present in many major cities but they have to be located and contacted using word of mouth.

Since grey market trading is done outside the recognized stock exchanges, any trades done using this route are not authorised or regulated by the stock exchanges. The risk in such trades is high and there are no redressal mechanisms in place in case of frauds.

GMP track record for major IPOs in 2021 and 2022

Grey market premiums are not always accurate and, in many cases, they have proved to be either too optimistic or too pessimistic.

Here’s how GMP estimates have fared for the top IPOs of 2021 and 2022 by issue size:


Source: IPOWatch, NSE

Apart from these, here are the top five stocks where the grey market premium was either too high or too low.


Source: IPO Watch | Percentage calculated based on difference between estimated listing price and actual listing price

It is worth noting that out of 87 companies, there were 36 where the difference between the estimated listing price and the actual listing price was 5% or less.

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