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What is the IPO Grey Market?

Topics Covered: Indian economy.

What is the IPO Grey Market?

Context:

Paytm’s stock has risen from ₹11,500 to ₹21,000 in four days in the grey market.

  • This is in response to Paytm’s announcement that it will bring an initial public offer (IPO) worth USD 3 billion later this year.

What is an IPO grey market?

Generally, when companies wish to raise funds to fuel their growth, they sell a part of their stock on the stock market. This process is called an initial public offering, or IPO.

  • But, an IPO grey market is an unofficial market where IPO shares or applications are bought and sold before they become available for trading on the stock market.
  • It is also termed a parallel market or an over-the-counter market.

Is it legal? How is it governed?

Since it’s unofficial, inevitably, there are no regulations that govern it. The Securities and Exchange Board of India (SEBI), stock exchanges, and brokers have no part to play in it. These transactions are undertaken in cash on a one-on-one basis.

What is the Kostak rate?

It relates to an IPO application. So, the rate at which an investor buys an IPO application before the listing is termed the Kostak rate.

Why do investors trade in the Grey Market?

  1. It’s an excellent opportunity for investors to purchase a company’s shares even before they are listed, especially if they feel that the company’s stock will increase in value.
  2. If an investor has missed the deadline for the IPO application or wishes to buy more shares then they can approach the IPO grey market.

What is in it for the companies?

  • For companies, the grey market is a great way to know how the demand for their shares is and how the company’s shares might perform once it is listed.
  • Apart from that, an IPO grey market could be used to gauge how the company’s stock will perform once it is listed.

Concerns:

The IPO grey market is an unofficial market that performs outside SEBI’s purview. Thus, there are no guarantees. All transactions are undertaken on the basis of trust and carry counterparty risk.

Therefore, there’s little legal recourse available to parties if the stock tanks.

 

Insta Curious:

Some more terminologies:

  1. Do you know what Black Market is? Read Here
  2. Do you know what Spot Market is? Read Here

 

InstaLinks:

Prelims Link:

  1. What is an IPO?
  2. What are listed companies?
  3. What are primary and secondary markets?
  4. About Sebi.

Mains Link:

Discuss the Concerns associated with grey markets in India.

Sources: Livemint.