How to Sell IPO Shares in Grey Market?

Grey market refers to the unofficial market where initial public offering shares or applications are bought and sold before their official market launch. There are no laws to govern this unauthorised over-the-counter industry. All its transactions are one-to-one and are carried out in cash.

In this market, the transaction is through grey market dealers or brokers, helping buyers and sellers to perform trades. One of the most important things about the grey market is the grey market premium, which depicts the price the shares are trading at over or under the issue price. A positive GMP reflects the expectation of a higher listing price; on the other hand, a negative GMP reflects the opposite.

Key Highlights

• The Grey Market for IPOs is an unofficial platform where the trading of shares or applications takes place before the listing of the IPO.

• The transactions are facilitated by local dealers. Prices are influenced by Grey Market Premiums.

• Grey market trading for IPO or applications involves selling shares that are not regulated and require an open Demat account.

• The grey market premium depicts investor sentiment and thus can influence the expected listing price of an IPO.

How to Sell IPO Shares in the Grey Market?

Selling IPO shares in the grey market requires navigating through an unregulated environment where trust and accurate information are crucial. Here’s how IPO shares in the grey market are sold:

• Since the grey market is an unofficial marketplace, buying and selling take place without the involvement of a broker. Not all brokers trade in the grey market. As a result, one must find a local dealer if they wish to sell an IPO on the grey market. 
• A Demat account is required for both applying for an IPO and selling shares in the grey market.
• The seller enters into a contract with a buyer through the local dealer to sell IPO shares before allotment.
• The buyer pays a Grey Market Premium (GMP) to the seller, aiming to profit from potential listing gains.

The buyer receives the shares and any profit that is owed to the seller if the IPO is issued to them, while the seller benefits financially from the premium.

So, although the seller receives additional money by receiving a premium, the grey market facilitates the buyer’s ability to profit from listing profits.

Furthermore, as the premium/GMP is a non-refundable payment, the seller is still entitled to it even if the shares are not allotted to him.

How to Sell an IPO Application in the Grey Market?

Just like selling IPO shares, an individual should know how to sell IPO applications in the grey market as well. The process of the same is defined below.

• Anyone who is qualified to submit an online application for an IPO in India will do so in a similar manner.
• A local dealer then offers the IPO application for sale on the black market.
• The GMP is determined based on the IPO’s supply and demand.
• The IPO application is purchased from the seller by any interested buyer who believes the application merits additional funding.
• If the seller is selected for the application in the first place, they will now need to give the buyer all of their shares.
• Following the distribution of the shares, the seller is not allowed to retain the profit. For any losses or lower listings, the buyer is responsible.
• The seller is still entitled to the benefit of the GMP even if IPO is not allotted to them.

This is how the sale of IPO applications functions in the grey market. Thus, if the IPO application is currently selling for a good GMP on the market, it suggests that the purchasers are prepared to pay a higher price because they believe the IPO is undervalued.

A greater GMP does not, however, always imply a strong listing. Thus, in order to make the most out of the IPO, an investor needs to consider all factors.

Important Features to Consider About GMP IPO

The grey market for IPOs holds significant importance and below are its important features:

• Participate in subtle grey market transactions with stockbrokers and investors in the initial public offering (IPO). Mutual trust is the foundation of these interactions.
• Expert sources or market research are used to calculate grey market rates.
• The premium you obtain for selling your IPO application to a third party off-market, even before the issue is published, is known as the Kostak Rate.
• If you plan to subscribe to the IPO Kostak rates at a premium, proceed with caution since the premium is subject to change before listing.
• Make sure that your choice of subscription is based only on the company’s core values.

Risks Associated with the Grey Market for IPOs

The grey market carries inherent risks that need careful consideration. The risks are outlined below:

• Lack of Regulation: The grey market operates outside of official regulatory frameworks, meaning transactions are not legally protected. This exposes participants to potential fraud and defaults.
• Volatility: The prices in the grey market are highly volatile and can change rapidly based on market speculation, leading to potential losses.
• Counterparty Risk: Since the grey market is unregulated, there is a risk that the counterparty may not fulfil its obligations, resulting in financial losses.
• Legal Implications: Trading in the grey market is technically illegal under SEBI guidelines, although enforcement is rare. However, participants should be aware of the legal risks involved.
• Risk of Overvaluation: Overvaluing an IPO might occur if one depends just on the grey market premium IPO. Investigating and analysing the company’s foundations in-depth is crucial. To determine its intrinsic value, consider its industry dynamics as well as the general state of the market. 
• Issues with Liquidity and Exits: To invest in IPO shares on the grey market, one must transact on unofficial markets. It might not be as easy to sell or liquidate investments on the black market as it is to trade on recognised exchanges. 

Conclusion

The grey market for IPOs is important at the pre-listing stage for it gives cues to the investor’s sentiments and the probable pricing at listing. Though it offers early profit opportunities by way of price discovery, its uncontrolled nature makes it quite challenging for participants. Selling IPO shares or applications on the black market includes contacting regional brokers, negotiating unofficial transactions, and understanding how grey market premiums work. Knowing the steps of how to sell an IPO in the grey market from the above article is considered beneficial for informed investors.

On the other side of the coin, against the potential profits, investors have to balance risks associated with investing, counterparty risk, volatility in the market, and probable legal repercussions. The grey market can be quite a useful instrument for knowledgeable investors. However, for maximum profits with minimum risks, one has to be cautious and be in a position to understand the workings of the grey market.

FAQs on Selling IPO Shares in Grey Market