Any company that wants to go public will propose its shares for the public to buy. The rate at which the company offers its shares is called an Initial Public Offering (IPO).
When investors think of investing or purchasing shares in an IPO, they look for the ones that give a good return. Grey Market Premium is an unofficial way to know which IPO might provide a good return.
Let’s dive into IPO Grey Market Premium, Kostak rate, and Subject to Sauda rate.
What is IPO GMP?
When a company comes up with an IPO, the calculated information based on the company’s demand is called Grey Market Premium (IPO GMP). IPO investors use GMP to comprehend the estimated price an IPO might list when it is announced.
IPO grey market starts in an unregulated market once the IPO date and price bands are publicized. GMP is affected by various factors like the existing market conditions, share subscription numbers, and demand.
Investors mostly look for this premium to gain a fixed return from the stock they purchase.
Grey Market premium increases when the demand for the IPO is high. This, in turn, increases the return of the investors. For example, if XYZ Company is going to issue its IPO in the next 20 days, at Rs 200 per share.
Some investors would not want to wait for these 20 days as they’d wish for the shares as soon as possible. This makes them buy and sell the shares prior to the issuance of the IPO. As a result of this, the Grey Market evolved for the IPO.
What’s the Kostak Rate?
The amount an investor pays for an IPO application before the IPO listing to the seller is known as the Kostak rate. Kostak rates react to the demand for an IPO just like the Grey market.
An investor can buy or sell their full IPO application on Kostak rates outside the market to fix profits.
When the Kostak rate is applied to the IPO applications, even if the investor has not received the IPO allotment, the buyer must pay the Kostak rates for the IPO.
Theoretical examples like Kostak rates and public issue gives the likelihood of allocation. It also allows earning good profits.
What’s Subject to Sauda Rate?
When an investor purchases a share for the firm in the IPO listing, the amount decided in their application is called subject to the sauda rate. In simple terms, the rate at which an investor gets his IPO allotment for his application is Subject to Sauda rate.
If the investor doesn’t get an allotment, the sauda is canceled.
Like Kostak rates, investors cannot fix profits at the sauda rate. Subject to sauda is like a deal. The deal is valid if the investor gets an allotment during the listing. Say, for example, two investors have agreed on a deal to buy or sell shares after the listing at Kostak rates.
If the allotments are given, the buyer is liable to pay the extra amount over the Sauda rate to the seller.
If the buyer does not get any allotment, he is not liable to pay any extra amount. It is also said that the Subject to Sauda rate is directly associated with the Grey market during the IPO listing.
For example, a company called ABC is coming up with an IPO at Rs 100 per share. IPO Shares are expected to list in 20 days. A seller can sell their Retail IPO allocation of Rs 2 lakhs at Rs 5000 on ‘Subject to Sauda.’
If the seller obtains an allotment, they will get Rs 5000.
If the seller doesn’t acquire an allotment, they won’t get anything.
How to Calculate IPO GMP?
Let’s say the IPO of a company is fixed at ₹ 200. If its IPO Grey Market Premium is operating at ₹ 65, then that company will be listed at ₹ 265. This is done so that the investors get up to IPO GMP 65% of the profit on the day of listing.
If the investor trades his shares on a listing day, he earns a profit, and if he keeps it for a long time, it confirms to be beneficial in the long run.
Latest IPO GMP rates
|
IPO NAME
|
IPO GMP
|
IPO PRICE
|
LISTING GAIN
|
|---|---|---|---|
Past GMP rates (Closed 2021)
|
IPO NAME
|
PRICE BAND
|
LISTING GAIN
|
|---|---|---|
|
Data Patterns
|
₹320-₹330
|
₹4000
|
|
Medplus Health IPO GMP
|
₹150-₹160
|
₹2500
|
|
Metro Brands
|
Metro Brands
|
₹0
|
|
MapMyIndia IPO GMP
|
₹690-₹700
|
₹900
|
|
Shriram Properties IPO GMP
|
Discount
|
₹0
|
Past GMP rates (Closed 2021)
- The grey market transactions are unofficial. No authorities are part of this. It relies on the trust between both parties.
- Subscribe only by viewing the Fundamentals of the companies.
- Trading or investing in Grey Market Premium is risky, and you must take some safeguards.
- The IPO grey market premium of any company is specified by its Demand.
Buying and Selling in the Grey Market
As the grey market is unofficial, the parties involved need to trust each other while making deals. No authorities are involved in this market, and the lawsuit would be difficult to make if something goes wrong.
Investors make their risks while trading in this market. The fluctuations in this market are high, which again may seem like a risk factor for investors.
IPO GMP is mostly for gaining profits that come with huge risks.
Grey Market – Legal or Illegal?
The Grey market may not be termed an illegal market. But as no officials or businesses are involved here, and all transactions happen between brokers, buyers, and sellers, the market has huge risks.
Trading in primary markets after the IPO listing is one of the safest options.
It is not about whether the market is legal or illegal as it doesn’t come under government or anyone’s possession. Rather, it can be said that this market is mainly for generating profits, which comes with its risks.
Difference Between Kostak and Subject to Sauda Rates
The main difference between the Kostak rate and the Subject to Sauda rate is that in the Kostak rate, an investor can fix profits, whereas, in the Subject to Sauda rate, we cannot fix profits.
The shares are sold at the rate agreed in the applications causing no difference to the investors who don’t make Kostak rate deals.
Key Takeaways
Both the Kostak rate and Subject to Sauda rates become the backbone for the upcoming IPO grey market and grey market premium.
Always remember to deal with Kostak rates only if you are ready to face the risks and incur losses.
An investor makes a profit with Kostak rate dealing but will also incur a loss because of the tax levied on the amount. This liability will solely be of the sellers.
Leave a Reply