Should your IPO investment be based only on grey market premium?

Of late, initial public offerings have been witnessing a strong response from investors — both non-institutional (generally called HNIs) and retail.

Of the ones last week, Tata Technologies, the only IPO from Tata group in 20 years, was subscribed over 69 times. Of that, retail investors’ portion was subscribed 16.50 times and NIIs by 64 times. Similarly, the public issue of Indian Renewable Energy Development Ltd, the first PSU company to hit the market after LIC, was subscribed 38.80 times with retail and HNI portions being subscribed 7.8 times and 24 times, respectively.

Some of the other IPOs that saw strong retail participation include Plaza Wires (375 times), Flair Writing Industries (13.7 times), Gandhar Oil (30 times) Valiant Lab (16 times) and ESAF Small Finance Bank (17.76 times).

Grey market premium

One of the main reasons for the strong response was grey market premium or GMP. Grey market, as the name suggests, is an unregulated and unauthorised market place where shares are traded even before they are listed on the main exchanges. The deals, though not on exchanges, are not illegal. This is not a new phenomenon, as it has been happening over a decade.

In fact, one of the market veterans, in his “X” post, said he bought HDFC Life at ₹175 and at ₹125 a share, about 10 years back, much before it was listed. His other investments included HDB Financials and NSE in unlisted space.

Besides, he also bought 17 shares of Tata Tech at around ₹1,700 a share (unadjusted for stock split and bonus issues) just prior to Covid in the unlisted space. (That now, to his surprise, has turned into 170 shares due to the stock split (from ₹10 to ₹2) and 1 : 1 bonus issue.

GMP is nothing but additional price that investors are willing to pay over the IPO price in the grey market before the stock is listed on the exchanges. The GMP trade normally starts a few days before the official IPO opening and continues till the listing date.

For example, Tata Technologies was commanding GMP of up to 70 per cent over the issue price prior to the opening and rose further to 80- 85 per cent. But, the stock trebled on the listing day, surprising even aggressive stock pundits and IPO investors.

In the case of Plaza Wires Ltd, against the issue price of ₹54, the premium jumped from ₹12 to almost ₹24, close to the IPO launch that attracted hordes of investors.

Speculative bets

So, should one invest in IPOs based on GMP alone?

First, investors should keep in mind that the GMP may not reflect the actual listing price. Grey market trading is a trust-based transaction between individuals. Besides, as it is not an official quote, it would be very difficult to check the veracity of the price as well. Also, there is every chance of GMP collapsing before listing as well.

Most importantly, there is the likelihood of shady promoters being in collusion with operators who jack up the GMP to attract investors.

Initial public offerings, once considered to be an investment for life, nowadays have turned into speculative bets to make profit on listing day itself. The shortened listing cycle to three days has further fuelled investors’ interest as their money is returned in quick time. saving on interest rates. With the shortened listing cycle, the trend is going to gain pace manifold, going forward, as there are still a lot of greedy investors who want easy money.