By Srikanth

Copyright thehindubusinessline

India’s IPO boom in 2020-2025 produced some dramatic debuts and an equally dramatic fascination with the grey market premium (GMP). Before listing in July 2021, Zomato reportedly traded at around 35 per cent GMP and then debuted 53 per cent above its ₹76 issue price. The opposite also occurs: Paytm’s ₹2,150 issue carried only around 2 per cent GMP and then fell around 27 per cent on debut. The question for investors is simple: should a high GMP be treated as a green light, or as noisy hype to be handled with care?

How the grey market works

The grey market is an unofficial, over-the-counter forum where dealers and brokers informally trade applications and allocations before shares list on the exchange. It isn’t regulated by SEBI like the formal market, and there is no formal investor protection. The GMP itself is just the rupee amount above the issue price implied by these off-exchange quotes. If an IPO is priced at ₹300 and grey quotes print at ₹360, the GMP is ₹60. Traders watch that premium as a shorthand for demand: a high, rising GMP typically signals expectations of a strong listing; a low or falling print points to weaker interest. But it remains an informal sentiment indicator, not a contract, and participants operate in a “grey” area — unofficial, not explicitly illegal, with limited recourse if trades sour.

Where the numbers come from

GMP figures circulate via dealer networks, private chat channels, and a few finance websites that aggregate snapshots. There is no central order book, so quotes can vary by time of day, city, and who is quoting. Two related quotes also float around: the Kostak rate, where a buyer pays a fixed sum for an entire application regardless of allotment outcome; and Subject-to-Sauda, where payment is made only if shares are actually allotted. These help speculators hedge or lock in gains, but they also underscore that grey activity rests on trust, not enforceable exchange rules.

What pushes GMP up or down?

Demand relative to supply is the primary driver. When bids from retail and institutions smash subscription limits, GMP tends to surge. Consider Nykaa: the ₹1,125 issue in November 2021 was oversubscribed around 82×; in the grey market, shares traded ₹650–680 above the band, roughly 60 per cent GMP. SBI Cards in March 2020 carried about 40 per cent GMP as investors anticipated value from a first-in-sector listing. Market mood matters, too: in a bull phase, “if-in-doubt, buy” can inflate premiums; when risk appetite fades, premiums can collapse, as they did when global volatility cooled enthusiasm for LIC’s record issue. Company factors —“hot” sectors, strong fundamentals — and recent IPO outcomes also feed expectations: in 2020, Happiest Minds listed +111 per cent and Burger King +92 per cent, emboldening traders to extrapolate fresh pops.

In short, GMP tracks perceived appetite. Market experts have observed that GMP hints correctly about 70-80 per cent of the time (within a 5-10 per cent margin). But they also caution that smaller IPOs can be gamed, and a small pool of dealers can create artificial heat — particularly when sellers of applications want to pre-book profits.

How to read GMP

Use trend, context, and corroboration. A spiking GMP can signal a strong debut is likely, but it is not insurance. Weigh the quote against category-wise subscription (especially QIB/HNI), the quality of anchor participation, and valuation versus peers. If the GMP is running hot but books aren’t broadly covered, treat it as a red flag. Likewise, a late-stage slide in GMP often points to cooling demand or negative news.

A practical checklist

Watch the trend, not a tick. Sustained rises across days beat one-day jumps.

Pair with subscriptions. An 80 per cent GMP on an offer covered 100× by institutions is different from the same premium on a barely covered deal.

Treat GMP as a sentiment gauge, not a guarantee. Even market strategists who track it closely say it’s not a perfect indicator.

Avoid unofficial side-deals you don’t fully understand. Enforcement rests on reputation, not regulation.

Where GMP hit — and where it missed

Plenty of hits: Nykaa’s around 62 per cent GMP translated into around 79 per cent first-day pop. MapmyIndia’s 77 per cent grey premium became a 53 per cent listing gain. Zomato’s around 35 per cent GMP preceded its 53 per cent lift on opening. These were well-subscribed offers with credible narratives, so the grey signal broadly aligned with day-one reality.

But there were misses and surprises. Paytm came with almost no premium (about ₹50 on ₹2,150), then fell around 27 per cent on debut. SBI Cards carried around 40 per cent GMP yet was one of only three IPOs in 2020 to list below the issue price. LIC’s gigantic offer saw its GMP fade from around ₹100 to around ₹40 late in the subscription and then listed 8-9 per cent below face (around ₹867 on a ₹949 issue price). Even Adani Wilmar, with a modest premium of about 15 per cent, listed around 4 per cent below (before stabilising later). The lesson is obvious: even white-hot or lukewarm grey quotes can under- or overstate the eventual print.

Pros and cons

Pros: GMP provides a quasi-real-time pulse of demand that a prospectus or static valuation table can’t. Because snapshots update daily, it can warn you when interest is weak (falling GMP) or exuberance is excessive (soaring GMP). Kostak and Sauda deals allow some participants to hedge allocation outcomes or lock in gains before listing.

Cons: The market is opaque and unregulated. Prices can be manipulated by rumour or concentrated dealer networks, especially in thin floats. A high GMP can lure retail into overpriced offers; a suppressed GMP can unfairly dampen good ones. There is no SEBI-backed recourse if a counterparty fails. Over-focusing on GMP encourages short-termism rather than long-term, fundamentals-driven investing.

Regulators acknowledge GMP’s influence on retail behaviour but continue to prefer official signals. SEBI is planning to introduce a “when-listed” platform that would shift pre-listing interest onto an exchange-based, transparent venue. Once implemented, this mechanism could preserve the useful signalling of GMP while reducing risks of manipulation and information gaps. Until the platform goes live, however, officials advise investors to focus on disclosed fundamentals and their own risk budgets rather than market hype.

Bottom line

GMP is a distinctive Indian pre-listening signal. Handled with care, it can complement due diligence; treated as prophecy, it can mislead. For any upcoming offer in 2020-2025-style market conditions (or beyond), do four things: track the GMP trend, check category-wise subscriptions, interrogate valuation versus peers, and read credible research. If all four line up, your case is stronger. If they don’t, remember: every grey-market quote rests on trust, not regulation. In a market that often rewards discipline, that single fact should anchor your decisions.

Potharla is Assistant Professor, ICFAI Business School, Hyderabad, and Shekar is Associate Professor, Institute of Public Enterprise, Hyderabad

Published on September 30, 2025