What is GMP in IPO?

Before shares and applications are formally listed on the stock exchange, investors trade them in an unofficial and clandestine market called the "grey market," often referred to as the "parallel market."

Cash transactions take place in person at this fascinating space in India. Third-party organisations, such as stock exchanges or SEBI, are not involved in this at all. In the Grey Market Initial Public Offering (IPO), two important terms that you must keep in mind are Kostak and Grey Market Premium.

Types of Trading in the IPO Grey Market

Grey market trade can be divided into two categories:

  • Selling or purchasing first public offerings (IPOs) before they list on stock exchanges.
  • Transferring IPO applications at predetermined premiums or rates.

Furthermore, you won't have to worry about a fund manager making a poor decision because these funds are handled passively.

How does the GMP Impact the IPO Listings?

The grey market premium can be used to gauge investor interest in a particular initial public offering (IPO) based on its positive or negative sign.

Like stock prices, the grey market premium for an IPO is based on supply and demand for the shares. If there are fewer subscriptions for a particular IPO than there are shares offered in the IPO, the GMP will be lower. On the other hand, if more subscribers sign up than shares are issued in the IPO, the GMP will grow.

Steps to Trade IPO Shares in the Grey Market

The following steps are involved in trading initial public offering (IPO) shares on the GMP certified:

  • Buyers and sellers participate in GMP in IPO applications on the grey market, just like in the selling of IPO shares.
  • Buyers offer a premium to sellers, determining the application's price based on assumptions and market conditions.
  • For extra security, sellers can offer their applications through a grey market dealer
  • Even if they do not obtain share allotments, sellers nevertheless receive the agreed-upon premium.
  • The dealer receives information from sellers and tells the customer of the transaction.
  • The issuing registrar allocates shares, and sellers may or may not obtain an allotment of shares.
  • If shares are allotted, sellers can either sell them for the agreed-upon price or move them to a Demat account. If shares are sold, settlement is based on profit or loss.
  • The transaction ends without settlement if no shares are assigned, but the seller still gets the premium.

The Bottom Line

To sum up, before an IPO begins trading on the official stock exchange, investors can get a sense of the demand and sentiment surrounding it through the grey market premium (GMP).

Frequently Asked Questions Expand All

The grey market refers to an unregulated market for goods and services that fall outside legal channels.

The degree of skill and understanding possessed by those involved in the IPO share grey market may vary greatly from that of a typical retail investor. GMP is, therefore, not a trustworthy predictor of IPO prices.

Adhering to GMP guidelines can be both beneficial and challenging for businesses as it sets a standard for product quality but requires significant investment in resources.

Regulatory bodies regularly monitor and inspect manufacturers in the grey market to ensure compliance with GMP guidelines. Overall, it is their responsibility to prioritise consumer safety and take necessary measures to enforce GMP regulations.