What is GMP (Grey Market Premium) & Kostak Rate?

What is GMP (Grey Market Premium)?

To understand GMP in a better way, let's first understand in brief what is Grey Market?

What is Grey Market?

Grey Market is the place where any company's any product is unofficially bought and sold. Grey Market is illegal.

What is Grey Market in the context of IPO (Initial Public Offerings)?

In the context of IPO, Grey Market is the place where the company's shares are bought and sold anytime before they list on stock exchanges for official trading. Like any other Grey Market, IPO Grey market is also unofficial and illegal. In spite of it being unofficial and illegal, a numerous deals happen on Grey Market across the country.

Now, what is GMP (Grey Market Premium)?

Whenever, any company announces its IPO, its GMP starts floating across the country in the Grey Market.

GMP is the difference between the price set by the company per share in the IPO and the price buyer is willing to pay per share in the Grey Market.

For example, the company has set the price per share in the IPO at Rs. 100. In the IPO grey market, the buyer is ready to buy from the subscriber of IPO at Rs.120 per share. Then, Rs. 20 (Rs. 120- Rs.100) is called GMP. The very nature of GMP is that it keeps on fluctuating probably from the IPO announcement till the listing day. GMP varies from city to city, buyer to buyer and IPO to IPO.

You can buy and sell the shares in the grey market. All buying and selling transactions happen before listing of the share. After listing, only settlements happen. You can buy any number of shares in the grey market, not necessary to buy in a particular lot.

Sometimes, GMP gives the fair idea about the actual premium at which shares may be listed.

How settlements happen?

If you are a seller in the grey market, you will get your GMP.

On the listing day, if share lists at premium above GMP, you have to pay the difference amount to the buyer of your shares in the grey market, and if share lists at premium below GMP or at discount, the buyer will pay you the difference.   

For example, the share price is Rs. 100. GMP is Rs. 20. So, the sell price in the grey market is Rs. 120. You have sold shares at Rs. 120 per share to the buyer in the grey market. 
On the listing day, if share lists above Rs. 120, let's say at Rs. 140, then you have to pay the difference of Rs. 20 per share to the buyer.
If share lists below Rs. 120, let's say at Rs. 110, the buyer will pay the difference of Rs. 10 per share to you.
If you are a buyer in the grey market, you have to pay a certain GMP to the seller.
On the listing day, if share lists at premium above GMP, the seller will pay you the difference. And if share lists at premium below GMP or at discount, then you have to pay difference to the seller.
For example, share price is Rs. 100. GMP is Rs. 20. So, the sell price in the grey market is Rs. 120. You have bought the shares at Rs. 120 per share from the seller in the grey market.
On the listing day, if share lists above Rs. 120, let's say at Rs. 140, the seller will pay you the difference of Rs. 20 per share to you.
If share lists below Rs. 120, let's say at Rs. 110, you have to pay the difference of Rs. 10 per share to the seller.
Please remember that all the transactions take place in your trading account. So, capital gain/loss liability and other charges such as brokerage, STT have to be borne by you. Trading in grey market happens on gross rate basis.

What is Kostak Rate?

In simple words, Kostak Rate is the price of your IPO application. In the grey market, you can sell your application and buy others applications. If you and your family members have demat accounts and you don't want to apply the IPO, you can sell your applications in the grey market. You get paid a certain amount per application. And that amount is called Kostak Rate. The same way, you can buy others applications by paying a certain amount. 

Kostak Rate varies from city to city, buyer to buyer and IPO to IPO.

Please remember that, the seller has to invest his/her own money for IPO application, the buyer don't finance.

After listing, settlements takes place. 

Let's say, if you have sold your application for Rs. 1000 in the grey market. And IPO application value for a single lot is Rs. 14000. You will apply the IPO from your account by putting your own money and wait till allotment happens.

If you aren't  allotted the shares, you will get Rs. 1000 from the buyer of your application.

If you are allotted the shares, then the settlement will happen on listing day. On listing day, if the listing value of your shares is above application money plus Rs. 1000 i.e. Rs. 15000, then you have to pay the difference to the buyer. And if the listing value is below Rs. 15000, the buyer will pay you the difference.

In a nutshell, as a seller, you get paid Rs. 1000 no matter at what price share lists at stock exchanges. Only settlements happen by paying or receiving difference amount.

Subject to allotment

Subject to allotment is also a type of Kostak Rate. The only difference is that if you sell your application under subject to allotment, you get paid the application price only if you are allotted the shares. The same way if you have bought the application, you will pay the price if the seller is allotted the shares.

Usually, subject to allotment rates is much higher than normal Kostak Rate. The settlement process is the same as happen in GMP and normal Kostak.

Conclusion:

The grey market is mainly for big dealers and their premium bigwig customers. Grey Market is gambling, satta. The small investors should not get into grey market for the sake of making quick money. As every deal is unofficial and unrecorded, the chances of default are very high. As a buyer or seller, you can lose your money. Capital Gain/Loss Liability and trading related expenses are additional burden. DO NOT APPRECIATE GREY MARKET

Thank you for reading...Jai Hind