With a surge in retail investor interest in both upcoming IPO and current IPO listings, one term that frequently pops up in market chatter is Grey Market Premium (GMP). Investors often look at GMPs to gauge the expected listing price of an IPO and decide whether to apply. But the key question remains—can you really trust grey market premiums as a reliable indicator of an IPO’s success?
What Is Grey Market Premium?
Grey Market Premium refers to the price at which IPO shares are traded unofficially before they are listed on the stock exchange. It gives a snapshot of demand and expected listing performance. For instance, if an IPO is priced at ₹100 and its GMP is ₹50, it implies that the shares are expected to list at ₹150.
These trades happen over-the-counter (OTC), through informal networks of dealers, and are not regulated by SEBI or stock exchanges.
Why Do Investors Watch GMPs?
- Quick Sentiment Gauge: GMP gives an early sense of market sentiment around an IPO.
- Listing Gain Hopes: A high GMP often leads investors to expect strong listing gains.
- Peer Benchmarking: Retail investors often compare GMPs of different IPOs to prioritise which one to apply for.
The Risks of Trusting GMPs Blindly
While GMPs may reflect demand to some extent, relying solely on them is risky. Here’s why:
1. No Regulatory Oversight
Since the grey market is unregulated, there’s no guarantee of accuracy, transparency, or fairness. Prices can be manipulated by a few players to create artificial demand.
2. Driven by Speculation
GMPs are often based more on hype and herd behaviour than actual fundamentals. A company with weak financials may still show a strong GMP due to marketing buzz or brand recognition.
3. No Reflection of Long-Term Value
Even if a stock lists at a premium due to high GMP, it may not sustain that level if the company’s performance doesn’t match expectations. Many IPOs have listed strong only to drop significantly in the weeks that followed.
4. Mismatch with Final Listing Price
GMPs are based on hearsay and limited deals, which might not align with the actual listing price influenced by broader market conditions and institutional investor behaviour.
Better Ways to Evaluate an Upcoming IPO
Instead of putting your trust entirely in GMPs, consider:
- Reading the company’s Red Herring Prospectus (RHP)
- Analysing its financial performance and valuations
- Reviewing the reputation and history of the promoters
- Checking QIB and HNI subscription levels for genuine institutional interest
Conclusion
Grey Market Premiums may provide a quick pulse on an upcoming IPO but should not be treated as investment advice. While they might offer clues about the likely performance of a current IPO on listing day, they often ignore the bigger picture—long-term business potential and fundamentals. Smart investing is about research, not rumours. Use GMPs cautiously, and always back your decision with data, not just demand.
