The Hidden Market Nobody Talks About (But Everyone Uses)
You just applied for an IPO. Your ₹100 application might be worth ₹130 in a secret market. Before the stock even lists on the stock exchange, people are already buying and selling shares in an unofficial space. This parallel marketplace has its own rules, its own prices, and its own risks. Here’s what you need to know.
What Exactly is the Grey Market?
Think of the grey market as a secret trading floor where IPO shares move hands before they officially appear on stock exchanges like NSE or BSE.
This market exists in a legal gray zone. It’s not illegal, but it’s also not regulated by SEBI or any government body. Dealers, brokers, and investors connect through informal networks—sometimes even over phone calls—to buy and sell IPO shares before listing day.
Key Point: Unlike the black market (which is completely illegal), the grey market operates openly but without any official supervision or protection.
Understanding Grey Market Premium (GMP)
Here’s the simple definition: Grey Market Premium is the extra money people are willing to pay for an IPO share before it lists on the stock exchange.
If an IPO’s official price is ₹100, and people are buying it for ₹130 in the grey market, the GMP is ₹30. This means the market expects the share to list around ₹130.
Formula:
- GMP = Grey Market Price – IPO Issue Price
- In this example: ₹130 – ₹100 = ₹30 GMP
Why would anyone pay more than the official price? Because they believe the share will be worth even more when it officially lists. They’re betting on gains.
How GMP Works in Real Life
Let’s walk through what actually happens:
Step 1: You apply for an IPO through official channels, hoping to get shares at the issue price of ₹100.
Step 2: A grey market dealer contacts you. They say: “I’ll buy your IPO application for ₹25 per share premium—that’s ₹125 total per share, even if you don’t get shares.”
Step 3: You agree and transfer your application to them (though you keep the risk of not getting allotment).
Step 4: When shares are listed on the stock exchange, the grey market dealer profits from the difference between what they paid you and what the shares are worth.
Step 5: If shares are listed at ₹150, the dealer makes a ₹25 per share profit. If they list at ₹120, the dealer loses money.
The Two Most Important Terms You Need to Know
1. Kostak Rate
This is a fixed payment for your entire IPO application. It doesn’t matter if you get shares or not—you get paid.
Example: The Kostak rate is ₹5,000. A buyer pays you ₹5,000 upfront for your application. If you get shares, they take them. If you don’t, they still paid you ₹5,000. You win either way.
Why is it lower than other premiums? Because the buyer is taking on all the risk of not getting allotment.
2. Subject to Sauda
This is a conditional payment. You only get paid if you receive a share allotment.
Example: The Subject to Sauda rate is ₹8,000. The buyer only pays you ₹8,000 if you get shares. If allotment fails, you get nothing.
Why is it higher than Kostak? Because there’s a real chance you might not get shares, and the buyer loses the opportunity to profit.
Simple Comparison:
- Kostak: ₹5,000 guaranteed (but lower rate)
- Subject to Sauda: ₹8,000 only if allotted (but higher rate)
What Actually Changes the GMP?
GMP isn’t random. Several real factors push it up or down:
- Strong Fundamentals: If a company has good revenue, profits, and growth, GMP climbs.
- Market Mood: When the stock market is booming, GMP is higher. When it’s pessimistic, GMP falls.
- How Many People Applied: If millions applied and the IPO received 100x subscription, GMP shoots up (high demand, limited shares).
- Famous Brand: Do people recognize the company name? GMP goes up. Unknown company? GMP stays flat.
- What Anchor Investors Do: Big institutional investors applying signals confidence. This pushes GMP higher.
- Hot Industries: IPOs in trendy sectors (tech, fintech, electric vehicles) often see higher GMP than boring sectors.
- Pricing: If an IPO seems cheap compared to other companies, GMP rises quickly.
The Paytm Story: How GMP Doesn't Guarantee Success
Here’s a real case study that teaches the most important lesson about GMP.
November 2021: Paytm (One97 Communications) launched one of India’s biggest IPOs. The grey market was buzzing with excitement.
Paytm had an extremely high GMP. Everyone expected huge listing gains.
What Actually Happened:
Paytm listed at ₹1,960 per share and fell sharply. It traded below issue price within weeks.
Why It Failed:
- Losing money rapidly
- High cash burn
- Weak profitability
- Extremely high valuation
Lesson: High GMP does not guarantee success. Fundamentals matter more than hype.
The Real Risk: GMP Doesn't Always Predict Listing Price
Here’s the uncomfortable truth: GMP is often wrong.
Example 1 – Success Story:
- Issue price: ₹151
- GMP expected: High premium
- Actual listing: ₹425
- Result: 181% gain. GMP was right.
Example 2 – Failure:
- IPO had positive GMP
- Market expected listing gains
- The stock is actually listed lower than the issue price
- Result: Investors lost money despite a positive GMP
Example 3 – False Hope:
- Stock listed with gains (as GMP predicted)
- But within weeks, the company showed weak fundamentals
- The stock crashed below the IPO price
- Result: Long-term investors lost money
The Bottom Line: GMP reflects short-term speculative sentiment, not long-term value.
What SEBI Is Trying to Do
The Securities and Exchange Board of India (SEBI) is considering something new: a regulated pre-IPO trading platform.
Instead of the current unregulated grey market, SEBI wants to create an official venue where pre-IPO shares can trade with transparency, proper record-keeping, and investor protection.
This would make the market safer and more fair for everyone, especially retail investors.
Real Examples That Teach Lessons
The Winner: Vibhor Steel Tubes (February 2024)
- Issue price: ₹151
- Listed at: ₹425
- Gain: 181%
Why it worked: Strong company fundamentals. Revenue exceeded ₹1,100 crore. Profit grew 80% in 2023. The company backed up the hype.
Lesson: When fundamentals are strong, GMP predictions are more likely to come true.
The Disappointment: Ola Electric
- Had strong GMP, suggesting big listing gains
- Initial listing gains attracted speculative buyers
- The company had weak fundamentals and cash burn issues
- Stock later fell below the IPO price
- Long-term investors lost money
Lesson: Don’t chase GMP predictions without checking the company’s actual business.
The Surprise: NTPC Green Energy
- Had weak/flat GMP, suggesting minimal gains
- Many investors skipped it due to low GMP expectations
- Stock listed with 3% gain and kept climbing
- Long-term performance was strong due to solid fundamentals
Lesson: Strong fundamentals can overcome weak GMP expectations.
Should You Care About GMP?
The honest answer: Only as one piece of information, not the main decision.
Think of GMP as a traffic indicator, not a destination sign. It tells you something about current market sentiment, but it doesn’t tell you where the stock is really going long-term.
The Bottom Line
Grey Market Premium exists in a legal gray zone. It’s not illegal, but it’s unregulated and prone to manipulation.
GMP can give you clues about market sentiment, but it’s not a crystal ball. High GMP doesn’t guarantee listing gains. Low GMP doesn’t guarantee losses.
The real driver of long-term investment success is company fundamentals, not grey market hype.
Before chasing any GMP, ask yourself: Do I understand this company? Does it make real profits? Is it priced fairly? Can I afford to lose this money?
If you can answer “yes” to these questions, then GMP becomes just a minor detail in your investment decision. If you can’t, then no amount of GMP excitement should push you to invest.
Remember: Sustainable wealth is built by investing in quality businesses, not by speculating on grey market premiums.
Quick Mental Checklist Before Applying for Any IPO
✓ Have I read the prospectus/ DRHP?
✓ Do I understand the business?
✓ Is the valuation reasonable?
✓ What’s my plan: Short-term gains or long-term wealth?
✓ Can I afford to lose this money?
✓ Am I ignoring the hype and focusing on facts?
If you answered “yes” to most of these, you’re thinking like a smart investor. If not, wait for the next IPO opportunity and do more research.
Remember, Grey market whispers. Fundamentals speak facts. Only one builds wealth — and spoiler, it’s not the gossip.
P.S. This content is for educational and informational purposes only
FAQs
Grey Market Premium (GMP) is the unofficial price at which IPO shares trade before listing. It’s the difference between the IPO issue price and the grey market price. For example, if the issue price is ₹500 and shares trade at ₹650, the GMP is ₹150. It indicates market sentiment but operates outside SEBI regulation, so it’s speculative and shouldn’t be treated as a guaranteed signal.
The formula is simple — GMP = Grey Market Price – IPO Issue Price.
If an IPO’s issue price is ₹250 and its grey market price is ₹300, then GMP = ₹50 or 20% (₹50 ÷ ₹250 × 100). It only estimates listing gains; real prices depend on fundamentals, subscription, and market mood.
The formula is simple — GMP = Grey Market Price – IPO Issue Price.
Ans: Not always. GMP is driven by sentiment, not company fundamentals. It can change with rumors, volatility, or operator activity. For instance, Lenskart’s GMP fell sharply before listing, while Vibhor Steel’s held strong due to real demand. It’s better used as an indicator, not a prediction tool.
Ans: The Kostak Rate is a fixed amount paid for an IPO application, whether shares are allotted or not — low risk, low reward. Subject to Sauda is paid only if shares are allotted — higher risk, higher return. Example: In the Groww IPO, Kostak was ₹1,200 while Subject to Sauda was ₹4,500.
Ans: GMP moves with demand, fundamentals, valuation, market sentiment, and sector buzz. High subscription and strong business models lift GMP; weak markets or overpricing push it down. Hype, rumors, and manipulation also cause daily fluctuations.
Ans: No. GMP reflects hype, not real value. The grey market is unregulated and risky. Always study fundamentals, financials, and business outlook before investing. Treat GMP as background noise — not a compass for wealth creation.
The information provided in this reference is for educational purposes only and should not be considered investment advice or a recommendation. As an SEBI-registered organization, our objective is to provide general knowledge and understanding of investment concepts.
It is recommended that you conduct your own research and analysis before making any investment decisions. We believe that investment decisions should be based on personal conviction and not borrowed from external sources. Therefore, we do not assume any liability or responsibility for investment decisions made based on the information provided in this reference.
