Current IPO GMP

The term GMP in an IPO refers to the Grey Market Premium. GMP is the unofficial price premium at which shares of an upcoming IPO (initial public offering) trade before the official listing. Let’s learn more about it below.

What is GMP (Grey Market Premium)?

The IPO grey market premium (GMP) is the unofficial price premium at which shares of an upcoming IPO are traded in a speculative, unregulated market prior to their official listing. This is indicative of robust investor interest, along with anticipated listing gains (if positive). It may also indicate weak demand (in case it’s negative), although it is not a guarantee of the actual listing performance of the IPO shares.

To put it simply, the GMP is the additional amount people would pay above the set IPO prices. This indicates market sentiments and potential gains upon listing. 

How is GMP Calculated?

There is no standardised or official formula for calculating the GMP of an IPO. However, traders use an indicative formula for calculation, since factors such as market sentiment, company fundamentals, economic scenarios, and overall demand for the IPO may influence the GMP. 

Indicative Formula Used by Traders

The formula typically used by traders is (Grey Market Price – IPO Issue Price). You can express the GMP as a percentage of this issue to understand the possible listing gains.

Let’s say the IPO issue price for a particular company’s shares stands at ₹200 per share, while the shares are trading in the grey market at ₹250 per share. In this case, the GMP stands at ₹50. This indicates an anticipated listing price of ₹250, though it does not guarantee it. In this case, the grey market premium is 25%.

Factors Influencing GMP for an IPO

The GMP for an IPO is influenced by these factors: 

• Demand & Supply

High investor demand for the IPO may lead to a higher GMP, while the reverse may lead to a negative or low GMP (trading at a discount). 

• Levels of Subscription

Higher oversubscription rates during the official IPO application period may enhance the GMP. This is because it indicates robust investor interest. 

• Fundamentals of the Company

The company's financial health, overall growth prospects, and business model are key factors influencing investor perception and the shares’ perceived value. 

• Participation of Anchor Investors

Higher interest from big institutional investors (QIBs or qualified institutional buyers) may boost confidence among retail investors and scale up the GMP. 

• Market Conditions

The broader stock market sentiments also play a role in this case. Bullish markets may lead to higher share GMPs. 

How GMP Helps Estimate the Listing Price in an IPO

If you’re looking at the IPO GMP live, you may estimate the listing price by using it as an indicator. As mentioned earlier, if the GMP for a share is ₹200 and the official issue price is ₹150 per share, the official listing price may ultimately settle at ₹150 per share. However, it is not always positive; it may also be negative. 

Types of Grey Market Deals

There are various kinds of grey market deals worth knowing about as well. Some of them include: 

GMP Trade

The Grey Market Premium trade is trading the actual shares of the IPO at a premium or discount to the official issue price prior to the listing. The GMP is the extra amount per share that buyers are willing to pay for the shares. The deal is finally settled on the listing day, with the trades based on expectations for the stock's performance. 

Kostak Rate

The Kostak rate is the fixed price at which the investor will sell the entire IPO application or a specific number of lots to the buyer, regardless of whether they receive the share allotment in the official process. In this trade, the seller receives a risk-free, upfront profit, while the buyer assumes all the risks and potential rewards of the listing and allotment. 

Subject to Sauda

It is a conditional trade deal for the sale of the IPO application. In this case, the transaction's validity will be ensured only if the seller actually receives the share allotment. The agreed price is usually higher than the standard Kostak figures. This is because the buyer is guaranteed the shares if the condition is met, thereby eliminating the allotment risk. 

Important Points to Consider about GMP in IPOs

Here are some pointers about the IPO GMP that you should know more about: 

• Unregulated & unofficial nature of the market

The grey market is not within the jurisdiction of official stock exchanges and other market regulatory bodies, such as the SEBI (Securities and Exchange Board of India). Transactions here are completely trust-based, while verbal agreements are mostly in place among investors and dealers. There are no legal remedies in case of any disputes. 

• Not a guaranteed tool

The GMP can indicate the investor interest and overall buzz over the IPO. However, it is speculative and may only give you a rough estimate of the potential gains at the listing. However, it cannot reliably forecast the long-term performance or actual listing price. 

• Huge volatility

The GMP may continue to fluctuate considerably, and that too in response to evolving market conditions, rumours, events, subscription levels, and other factors. 

Is GMP Reliable for Investors for IPOs?

Is GMP reliable at all for you as an investor when considering an IPO? Let’s find out: 

When GMP Can Be Helpful

GMP may help gauge investor interest and overall sentiment. It is an early indicator of potential listing gains or losses before the official listing. For high-profile, big-ticket IPOs, it may give you a directional guide to the market mood, but it is not a guarantee. 

When GMP Can Be Misleading

GMP trading takes place in an unregulated, unofficial market, with no legal protection and considerable risks. Connected groups or insiders may end up inflating the GMP through coordinated trading to attract more retail investors, creating a false sense of high demand. GMP often fails to predict actual outcomes at the listing, instead relying on speculative mood rather than company fundamentals. The GMP does not account for institutional flows or last-minute developments. 

IPO GMP vs Subscription vs Fundamentals

When you’re making an investment decision, you’ll naturally look at multiple investment indicators. Some of them have been compared below: 

Risks of Relying Only on GMP

Relying only on the IPO GMP can be catastrophic. Here’s why: 

• Zero transparency and the lack of regulation

The grey market is unofficial and unregulated, outside SEBI's jurisdiction and management. This makes the data unreliable and the transactions highly risky. Manipulation is also possible through coordinated trades. 

• Speculation and volatility

The GMP rapidly fluctuates on sentiment and rumours, without focusing on fundamentals. This may create a misleading impression of future profits or demand. 

• Artificial inflation/manipulation

Smaller sample sizes and insider manipulation may also artificially inflate the GMP. This may lead to false hopes regarding higher gains at the time of the listing. 

• Zero guarantees

High GMPs do not guarantee profits or shares. The actual listing is based on formal rules for allotment and other market forces. 

• Overvaluation risks

Focusing solely on the GMP may lead to overvaluation in an IPO, resulting in poor investment choices when the hype does not translate into reality. 

• Zero legal protection

The transactions in the grey market are all trust-based, meaning that you do not have any legal protection in case your deal does not materialise properly.