What is the gray market? The gray market is an unofficial market where securities, such as stocks or bonds, are traded before they are officially listed on a stock exchange. This market operates outside regulated exchanges and is not subject to the same regulatory oversight. In the context of IPOs, this market allows investors to buy and sell shares of a company that is about to go public but has not yet been listed. The price at which the unlisted shares trade in the gray market is then used to comput the IPO gray market premium.
Characteristics of the Gray Market
Here are some of the characteristics of the Gray Market:
1. Unregulated
Transactions in the gray market are not supervised by regulatory bodies, which means they lack formal oversight and investor protection.
2. Liquidity
It provides a platform for investors to trade shares before the official trading begins, offering liquidity and potential price discovery.
3. Price Indication
The prices in the gray market can give an early indication of how the stock might perform once it is officially listed.
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What is the IPO Gray Market Premium (GMP) Calculated?
GMP refers to the difference between the expected price of an IPO in the gray market and the price at which it is offered to the public. It represents the premium or discount investors are willing to pay in the gray market for shares of the IPO.
Calculation:
IPO Gray Market Premium = (Gray Market Price – IPO Issue Price) / IPO Issue Price × 100
For example, if an IPO is priced at ₹100 and trades at ₹120 in the gray market, the GMP would be 20%.
Significance:
- Demand Indicator: A high GMP indicates strong demand and positive sentiment about the IPO, suggesting that investors expect the stock to perform well once listed.
- Market Sentiment: GMP can provide insights into market sentiment and help gauge the potential success of an IPO before it officially launches.
How can Investors use IPO Gray Market Premium while making Investments in an IPO?
Investors can use the GMP in the following ways while investing in the markets.
1. Assessing Market Sentiment
A high GMP suggests that investors expect the stock to perform well once it’s officially listed. If the GMP is significantly high, it might signal strong demand and potential for a substantial listing gain. A low or negative GMP indicates weak demand or potential concerns about the IPO. This might be a sign of investor scepticism or doubts about the company’s prospects.
2. Evaluating Demand
GMP provides pre-listing insights into the market’s appetite for the stock. Understanding GMP can help investors gauge whether the IPO price is attractive compared to current market expectations.
3. Making Investment Decisions
Investors can use GMP to decide about the timing of investment in an IPO. If GMP is high, it might be a good indication to participate as the stock could perform well post-listing. Conversely, a low GMP might suggest reconsidering the investment or seeking other opportunities. GMP can assist in deciding how much to allocate to the IPO. If GMP is high, investors might consider a larger allocation, assuming the premium reflects a promising investment opportunity.
4. Setting Expectations
GMP helps in setting realistic expectations regarding potential returns. A high GMP might indicate that there is a possibility of immediate gains once the stock starts trading. However, it’s essential to remember that GMP does not guarantee future performance. High GMP can sometimes lead to overvaluation. Investors should be cautious and not solely rely on GMP. Market conditions, the company’s fundamentals, and broader economic factors should also be considered.
5. Risk Management
While GMP can provide useful insights, it is crucial not to rely solely on it for investment decisions. GMP reflects market sentiment but does not guarantee future performance. Investors should conduct thorough due diligence on the IPO’s fundamentals and overall market conditions.
Examples of Using IPO Gray Market Premium
Let us understand this concept more using the real-life example IPO listings:
| Particulars | Tata Technologies | Zomato | LIC |
|---|---|---|---|
| IPO Open Date | November 22, 2023 | July 14, 2021 | May 4, 2022 |
| IPO Close Date | November 30, 2023 | July 16, 2021 | May 9, 2022 |
| Listing Date | November 30, 2023 | July 23, 2021 | May 17, 2022 |
| Face Value | ₹2 per share | ₹1 per share | ₹10 per share |
| Price Band | ₹475 to ₹500 per share | ₹72 to ₹76 per share | ₹902 to ₹949 per share |
| Lot Size | 30 Shares | 195 Shares | 15 Shares |
| Final Issue Price | ₹500 per share | ₹76 per share | ₹949 per share |
(Source: Economic Times)
Case 1: Tata Technologies
| GMP Date | IPO Price | Estimated Listing Price | GMP | GMP % |
|---|---|---|---|---|
| 30-Nov-2023 | ₹ 500 | ₹ 975 | ₹ 475 | 95% |
| 29-Nov-2023 | ₹ 500 | ₹ 925 | ₹ 425 | 85% |
| 28-Nov-2023 | ₹ 500 | ₹ 875 | ₹ 375 | 75% |
| 27-Nov-2023 | ₹ 500 | ₹ 914 | ₹ 414 | 83% |
| 26-Nov-2023 | ₹ 500 | ₹ 914 | ₹ 414 | 83% |
| 25-Nov-2023 | ₹ 500 | ₹ 900 | ₹ 400 | 80% |
| 24-Nov-2023 | ₹ 500 | ₹ 914 | ₹ 414 | 83% |
| 23-Nov-2023 | ₹ 500 | ₹ 903 | ₹ 403 | 81% |
| 22-Nov-2023 | ₹ 500 | ₹ 895 | ₹ 395 | 79% |
(Source: Chittorgarh)
Analysis of Tata Technologies IPO and GMP
The GMP data for the IPO showed a significant increase in investor sentiment as the listing date approached. Starting from a 79% premium on the opening date and rising to 95% by November 30, the growing GMP indicated strong demand and positive expectations. The estimated listing price ranged from ₹850 to ₹975, reflecting substantial potential gains for investors who subscribed at the IPO price of ₹500.
The upward trend and high GMP percentages suggested robust market confidence in the IPO’s performance. This confidence was reflected in the subscription of IPO, which was 69.43 times, whereas its retail portion got subscribed 16.50 times.
The public issue got subscribed 62.11 times in NII category whereas its QIB portion got subscribed a whopping 203.41 times. However, the IPO was listed at nearly half of the estimated price on the listing date, suggesting that there was excessive overconfidence in the stock.
Case 2: Zomato Limited
| GMP Date | IPO Price | Estimated Listing Price | GMP | GMP % |
|---|---|---|---|---|
| 23-Jul-21 | ₹ 76 | ₹ 98 | ₹ 22 | 29% |
| 22-Jul-21 | ₹ 76 | ₹ 97 | ₹ 21 | 28% |
| 21-Jul-21 | ₹ 76 | ₹ 94 | ₹ 18 | 24% |
| 20-Jul-21 | ₹ 76 | ₹ 94 | ₹ 18 | 24% |
| 19-Jul-21 | ₹ 76 | ₹ 91 | ₹ 15 | 20% |
| 18-Jul-21 | ₹ 76 | ₹ 94 | ₹ 18 | 24% |
| 17-Jul-21 | ₹ 76 | ₹ 90 | ₹ 14 | 18% |
| 16-Jul-21 | ₹ 76 | ₹ 86 | ₹ 10 | 13% |
| 15-Jul-21 | ₹ 76 | ₹ 83 | ₹ 7 | 9% |
(Source: Chittorgarh)
Analysis of Zomato Ltd. IPO and GMP
The GMP data for this IPO indicated strong and growing investor optimism leading up to the listing date. Starting with a positive GMP of 9% on July 15, the premium rose steadily, reaching 29% by July 23. This consistent increase in GMP reflected high confidence in the IPO’s performance and suggested that the market anticipated a strong debut.
This IPO subscribed 38.25 times. The public issue subscribed 7.45 times in the retail category, 51.79 times in the QIB category, and 32.96 times in the NII category.
Case 3: Life Insurance Corporation
| GMP Date | IPO Price | Estimated Listing Price | GMP | GMP % |
|---|---|---|---|---|
| 17-May-2022 | ₹ 949 | ₹ 923 | ₹ -26 | -3% |
| 16-May-2022 | ₹ 949 | ₹ 929 | ₹ -20 | -2% |
| 15-May-2022 | ₹ 949 | ₹ 934 | ₹ -15 | -2% |
| 14-May-2022 | ₹ 949 | ₹ 931 | ₹ -18 | -2% |
| 13-May-2022 | ₹ 949 | ₹ 944 | ₹ -5 | -1% |
| 12-May-2022 | ₹ 949 | ₹ 937 | ₹ -12 | -1% |
| 11-May-2022 | ₹ 949 | ₹ 939 | ₹ -10 | -1% |
| 10-May-2022 | ₹ 949 | ₹ 954 | ₹ 5 | 1% |
| 09-May-2022 | ₹ 949 | ₹ 957 | ₹ 8 | 1% |
| 08-May-2022 | ₹ 949 | ₹ 970 | ₹ 21 | 2% |
| 07-May-2022 | ₹ 949 | ₹ 989 | ₹ 40 | 4% |
| 06-May-2022 | ₹ 949 | ₹ 999 | ₹ 50 | 5% |
| 05-May-2022 | ₹ 949 | ₹ 1,012 | ₹ 63 | 7% |
| 04-May-2022 | ₹ 949 | ₹ 1,009 | ₹ 60 | 6% |
(Source: Chittorgarh)
Analysis of PIC IPO and GMP
Predominantly, GMP indicated strong initial investor interest and optimism, with estimated listing prices exceeding the IPO price of ₹949. Starting from May 6, the GMP began to decline, turning negative by May 11. This shift suggested a change in investor sentiment, with decreasing confidence in the IPO’s performance as the listing date approached, possibly due to revised expectations or market conditions.
The LIC IPO was subscribed 2.95 times. The public issue subscribed 1.99 times in the retail category, 2.83 times in the QIB category, and 2.91 times in the NII category.
Wrapping Up
The Gray Market Premium (GMP) helps investors understand the market sentiment before an IPO is listed on the exchange. Investors need to note that the GMP is not always accurate. Factors like market volatility, investor sentiment and company performance can influence GMP. Investors should exercise caution, considering GMP as one of many factors in their investment decisions. It is best to look at GMP as one of the indicators, not a guarantee of listing day performance.
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