How to sell IPO applications in grey market?

In the grey market, IPO applications can be traded at either the Kostak rate or the Sauda rate. The difference between the two is that the seller receives the Kostak even if no shares are allocated, however, subject to sauda rates are only paid when seller receives allotment.

Let us illustrate this with an example.

Suppose an investor has applied for an IPO for 150 shares at Rs 100, so the application amount for the IPO is Rs 15,000. Now a buyer is interested in acquiring the IPO application in the grey market. He can buy the application either at Kostak rate or Sauda rate.

Suppose the buyer has purchased the IPO application at the Kostak price of Rs 2000. It does not matter whether the seller receives an allotment of shares or not, the buyer will pay the Kostak rate. In this case, if the seller does not receive any shares, he will still get Rs 2000 as Kostak rate.

So, there is a risk of no allotment and to avoid this, some buyers in the grey market may be interested to purchase IPO applications at a subject to sauda rates. In such deals, the buyer only has to pay the sauda rate if the seller receives the allotment; if there is no allotment, the deal is cancelled.

For this reason, sauda rates are generally higher than Kostak rates.