Are grey market predictions accurate enough for estimating listed price?

The IPO market has been heating up since the past year. It continues to blaze with recent news reports citing over three dozen companies lining up to raise funds worth over Rs 35,000 crores in the coming months, in order to fund expansion and working capital needs. This comes on the back of over 15 companies having already hit the capital markets in 2018 and last year’s record capital raise of Rs 67,000 crores by 36 companies through the IPO route.

Fuelled by this boom in the IPO market, there is another market – less visible but highly active i.e. the ‘grey market’ for IPOs. This is an unregulated market place where the shares of IPOs are traded even before they get listed on the exchanges and in extreme frenzied bull markets, even before the issue opens for subscriptions. The price at which an issue is traded in the grey market is often taken as an indicator of what the final listing price may be and traders make bets or invest accordingly.

The price quoted in the grey market, which is decided by the merchant bankers, promoters and market operators, is usually at a premium. This is done so as to create an illusion of demand for the issue among investors. The market sentiment, funding costs for market operators and also company valuations plays a role in determining the grey market price for an IPO. However, more often than not, investors who deal in the grey market are concerned only with listing day gains.

Usually, brokers facilitate the deal in the grey market once the premium is decided. This is done by transferring the shares to the grey market dealer’s account or selling the stock in the open market.

These grey market premiums have not always been the most accurate indicators of the final listing price of securities. Cases have been reported wherein grey market buyers have cancelled a transaction when the market fell on the listing day, with many investors being left holding unwanted stocks in their portfolio.

Grey market premiums are heavily dependent on market momentum. When market trends are higher, grey market premiums tend to shoot up and vice-versa. In September of 2017, grey market premiums of leading insurance companies like ICICI Lombard General Insurance and SBI Life Insurance Company fell sharply, trading even at discounts to their listing price. Both these issues saw the HNI portion go unsubscribed.

Even for issues like CDSL IPO, which got subscribed to over 560 times by HNIs saw its grey market premium slip substantially ahead of listing. However, on listing day, the leveraged HNI investors were able to make up their gains due to bumper listing of the stock, up over 68% on the listing.

Grey market premiums cannot accurately predict an IPO’s final listing price, despite strong influence from HNIs, financiers and market operators. In fact, it is a tool for these leveraged investors to entice retail category into IPOs simply for listing day gains, without promoting the intention of long term investment based on the fundamental analysis of companies.

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