What is Grey Market Premium (GMP)?
Terms used in Grey Market, explained in simple words

Many of the investors believe that the grey market premium and fix application rates etc. are just games of the market operators/speculators. Many people also believe that with some underhand dealings, the IPO-promoters do manage grey market premium.

No, such thinking does not have much substance. The ups & downs of the stock market are also considered as the game of the operators and speculators. Yes, such belief is true in some cases, whereas in most of the cases, the trend in the stock-market depends on the actual performance of the company and also the expectations of the performance.

Similarly, even in the grey market, the factors such as expectation and estimation of oversubscription of the IPO and estimation of listing price etc. are determining factors for GMP, Subject to rates and Fixed Rates for Application.

Let us first explain these terms.

Grey Market is an unofficial market for the Pre IPO.

Grey Market Premium or GMP is estimated premium per share ( eg estimated listing price minus the issue price). GMP moves up or down based on the changes in the estimate of listing price.
Let’s explain in detail.
There is an IPO for a company “Wealthy”, and it offers the shares at Rs. 50
If the grey market expects the listing to be at Rs. 90. The GMP will be around Rs. 36/37 (Rs. 90 less Issue price of Rs. 50 less Charges of the intermediaries/Grey market dealers.)
Estimate of Listing price     Rs. 90
less: Issue price                   Rs. 50
Less: Grey operator charge Rs. 3/4
= GMP                                 Rs.36/37
Kostak or “Fixed Rate for Application” (e.g., fixed rate) is premium per application. Kostak is also based on GMP as well as interest cost
“Subject to Rate for Application” (e.g., Subject to) is premium for the allotted application. Here the amount is payable or receivable only subject to the allotment e.g., if one gets allotment. It is based on grey market premium and also interest cost.

Do understand that all these rates are determined after Indepth calculations. They are not imagination or guess work or act of manipulators.

Do understand that GMP is unofficial, thus there are no regulatory (No Rules and Regulations).
All transaction for GMP is done in cash.
No written communication for Grey Market, small slips of paper is the contract.
There is no official dealer – All buying and selling through word of mount and trust only. So it may happen that a dealer may obey the grey market contract and you cannot take any legal action/steps.

GMP activity may start even before the price band announcement, when the dealers have some hint about the IPO-price/lot etc.

Cricket & the Bookies: The way, the bookies are part and parcel of a cricket match, the grey market trends are also authoritarian part & parcel of an IPO. Many a times, the bookies go wrong in predicting an outcome of a cricket match and in same way grey market trends may turn out to be wrong, but that does not undermine its importance.

Do understand, we at Chanakya do not deal in Grey Market, we do not recommend grey market trading. Investment or IPO application based on grey market may turn out to be a wrong decision.