Most of us do not know how shares are traded in the grey market. Trading in the grey market for IPOs is done in two different ways:
Trading IPO shares in the grey market:
- Suppose an investor has applied for the IPO. Now there is a financial risk that the shares will not be allotted or that the IPO shares may be listed at a discount to the offer price. These persons are referred to as sellers.
- Other people who expect to make a good listing gain from the IPO are interested in buying the IPO shares before the actual allotment takes place. These individuals are referred to as buyers.
- The buyers will now buy the IPO shares at a certain price from the grey market dealers.
- Grey market dealers will then approach potential sellers who had invested in the IPO and ask them if they want to sell their IPO shares at a certain premium. To avoid the risk of a negative listing, the seller may sell the IPO shares to the grey market dealers to book a profit.
- The dealer now collects the application documents from the sellers and informs the buyer about the number of shares purchased from the sellers.
- Once the allotment has been made and the seller has received the allotment, the dealer will get in touch with him to either sell the IPO shares or transfer them to another demat account.
- Since all transactions in the grey market are not regulated by SEBI, so it’s up to the discretion of the seller whether to sell them or not, without any obligation to do so.
- If the seller sells the shares, the grey market transaction will be settled with the corresponding profit or loss.
- If the seller has not received the allotment, the transaction is automatically cancelled.
Trading IPO Applications in the Grey Market:
Trading in IPO applications means buying and selling all the shares that the seller has applied for. Just like IPO shares, IPO applications can also be traded in the grey IPO market.
- The seller is the person who applied for the IPO and the buyer is the person who wants to buy the IPO applications on the grey market.
- Since the buyer has an interest in the company, he approaches a grey market dealer who then finds a person who wants to sell his IPO applications at a certain price. A person who sells IPO applications books the profit in advance, before the actual listing takes place, because even if no allotment is made, he receives the Kostak amount.
- The seller provides a detailed application form to the grey market broker and the latter sends a notice to the buyer that the IPO application has been bought at a certain price.
- Once the registrar decides allotment of the IPO, the dealer will contact the seller to sell the allotted shares at a specified price or transfer them to the demat account of the buyer.
- If the seller sells the shares, he has to provide the listing gain/loss to the buyer. Hence, the settlement will be at profit or loss.
- However, if there is no allotment, there is no settlement but the seller still makes profit as he gets the Kostak rates for the IPO applications sold.
