How IPO Listing Price Is Determined and Effect of Grey Market

An initial public offering (IPO) is the process by which a private company becomes publicly traded on a stock exchange. Once a company is public, it is owned by the shareholders who purchase the company's stock when it is put on the market.

There are typically 2 types of IPOs
  1. Fixed Price
  2. Book Building

How IPO Works?

IPOs process is regulated by the Securities and Exchange Board of India (SEBI). If a company wants to issue shares through IPO than first company have to register with SEBI. Once SEBI approved the company for IPO then company decides the price of IPO and the number of shares plans to issue.

There are many reasons for a company to go public-
  • When a company needs money or want to raise money for company`s growth or for paying debts then generally IPO is the best choice.
  • IPO enables cheaper access to capital
  • IPO increase exposure, prestige, and public image of the company.

What is The Role of Bank in IPO?

When a company goes for issue a new IPO, Company needs bank as investor which serves multiple purposes
  • The bank works as a financial adviser for the company.
  • The bank helps in the underwriting of the new issue of stock.
  • work and come around a offer price and valuation is based on the two factors viz. 
    • Qualitative Components
    • Quantitative Components

What are Qualitative Components

Is is not always the numbers or financial projects, some of the qualitative factors will play a powerful role in deciding valuation of the share more prominently. If a company is bringing an all new new product or service that will change the way we do things, or it may be on the cutting edge of a whole new business model. Likewise as it happened for the hype over internet stocks back in the 1990s. Companies that promoted new and exciting technologies were given multi-billion-dollar valuations, despite have little or no revenues. Similarly, companies undergoing an IPO can bulk up their story by adding industry veterans and consultants to their payroll, giving the appearance of a growing business with experienced management.

What are Quantitative Components 

Unlike the qualitative one; these rely on the various other factors which are not related to the fundamentals of the company. Like any sales effort, a successful sale hinges on the demand for the product you are selling - a strong demand for the company will lead to a higher IPO price. Strong demand does not mean the company is more valuable.  With the qualitative components it may also happen that Two identical companies may have very different IPO valuations merely because of the timing of the IPO as compared to market demand, in-spite of the similar qualitative components. 

Effect of Secondary Market or Grey Market on IPO 

Grey market have impact on the listing price of the IPO, and have associated many terms with it. We'll understand working of the grey market and its associated terms one by one 

How Grey market works in Stock market?

Grey Market is is an unofficial market where IPO applications or shares are bought and sell before they become officially available for trading on the stock exchange like NSE or BSE.

these trading transactions in Grey market trading include :
  • Trading (selling or buying) IPO Applications at certain rate (premium) and
  • Trading (selling or buying) allocated IPO shares before they list on stock exchanges.
Grey market trading is usually done among the small set of people who trust each other as there is no official platform or rules define for these trading.

Two popular terms used in IPO grey market are ‘Grey Market Premium' and ‘ Kostak'.

Grey market premium is a premium amount in rupees at which IPO shares are being traded in Grey Market before they get listed in stock exchange. Grey market premium can be in positive or in negative based on demand and supply of the stock. This will be a deciding factor to check final price at which the IPO can be listed in stock exchange and your listing gain or loss if the shares are alloted to you. 

What is Kostak in Grey market?

As we explained in above example for the working of Grey Market; Kostak (or price of application) is the premium amount in rupees at which IPO applications are being traded in IPO Grey Market. Usually ‘Kostak' value is defined as the premium of a maximum lot retail application in an IPO. It is the Grey Market Premium (GMP) which is the on and above of the bidding price and the value at which IPO can be get listed.

In Grey market transaction 2 parties are involved.
Seller of Bid (S)
Buyer of Bid (B)

Those Investors who sold their bid at kostak price have no risk now. He would be given the predetermined amount whether he will be alloted shares or not.

Risk takers buy these bids at Kostak Price. They would earn money if the share got listed at Premium above the GMP.

Let's take an example of Share X
Issue price: Rs 225
Lot size: 65 Shares
Kostak: Rs 700
GMP: Rs 40

So if you sold your bid to buyer he would have to pay you Rs. 700.

Now Share got listed at Rs. 300 which is Rs. 75 Premium over the issue price of Rs. 225. Suppose you got allotment. So you will sell your shares at listed price or above it. So the Capital Gain to your account is Rs. 75(300-225)*65 Shares = Rs. 4,875. But as decided you can have only 700, so the Balance is the profit of buyer for taking the risk. You have to pay him Rs. 4175. But if you didn't get the allotment, he will pay you 700.

Price changes in Grey Market 

Grey market premiums changes and moves upside or downside like listed stock prices in authorised stock exchanges like NSE or BSE.  Ultimately the stock price is based on demand and supply. More buyers then sellers will pull up the grey market premiums, while more sellers then buyers could pull it down. There is change in many things starting from when a company announces an IPO to the IPO listing day. Thus the grey market premium keeps changing every day, every hour.

Many investors / traders also perform Short selling in grey market if investors / traders think that stock price will go down after listing.

Your IPO Application and Effect of Grey Market

A over subscribed IPO is going to give investors a listing gain as well as long term gain if you get shares allotted at the time of IPO. You can increase your changes of IPO allotment with these IPO application tips and tricks. To identify good IPO for these gains; before applying IPO you should consider various factors such as 
  1. Financial conditions of company
  2. Business Model
  3. Promotors 
  4. Issue size
  5. upcoming projects
  6. Investment plans 
  7. Grey Market premium
  8. Kostak
Although Investor should consider grey market premium as one of the parameter before applying for IPO Stocks, good grey market premium doesn't guarantee for listing gain or long term gains as they may change in the duration when you apply for an IPO and when the issue gets listed.


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