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GMP is used to anticipate the listing price of IPO, but it is not always a reliable indicator.
Many factors such as market sentiment, demand for the public issue, and the size of the IPO subscription affects GMP. In addition, the GMP can be manipulated, especially for smaller IPOs of SMEs.
An IPO can be priced below or above the share’s grey market premium. It is possible for an issue with high demand to be listed at a price above the GMP. The Tata Technologies IPO is one of the best examples: The offer price was Rs 500, the GMP of the stock was Rs 475 (95%), and the stock got listed at Rs 1200 (140% gain).
An IPO that trades at a premium in the grey market can either be listed at a small profit or even at a loss. The IPO of SRM Contracts, which was expected to make a profit of 33% based on the GMP, was listed at a profit of only 2.50%.