Grey market deals in cash, action warranted: Experts

Nagpur: During the run-up to the Life Insurance Corporation of India, better known as LIC, listing on the stock exchanges slated for Tuesday, grey market premium (GMP) has become a buzzword among investors and analysts. The IPO grey market, which has been there since decades, has openly become a parameter to judge investment decisions especially during the LIC IPO, said sources.

Market players TOI talked to explained this is nothing but an illegal parallel transaction going on in unaccounted money. The premium or discount is based on the assumption of the demand for a certain IPO (initial public offer). Experts said it is not a healthy trend and regulators should act against the grey market operators.

TOI takes a look into how it operates and the way premium or discount is determined. Operators are mainly based in centres like Ahmedabad, Jaipur, Surat and Bhuj. Although, Nagpur also has a small share in the business, said sources.

Sources said the discount or premium of a given share is based on the number of times the IPO is oversubscribed. Suppose the subscription is below a certain level, the share trades at a discount or lesser premium.

The grey market dealings are contracts for difference. For example, an individual buys LIC share for Rs1,000 in the grey market but the scrip gets listed for Rs900 on the official bourses. In such case, the difference has to be paid in cash to the grey market channel by the individual. It’s vice versa if the share is listed for a higher amount, said sources. The entire dealings happen in cash and are not accounted for.

Dealings only take place within close circles or through assured links which can be regular brokers too, said a source requesting anonymity.

Sources said the grey market rates are, however, fairly perfect. The commitments are largely honoured in this trade.

Kailash Jogani, former president of Nagpur Chamber of Commerce Limited (NCCL), said, “Parameters like overall demand for the share, the price band and general trend of the market are considered for determining the trend. The operators working in the official markets largely come up with such calculations.”

Jogani says the grey market operators can also be involved in rigging the price. On the listing day, attempts are made to take the rates in the official market at par with the grey market. That is the reason there are wide fluctuations on the listing day. However, it can ultimately leave the retail investors in losses, he said.


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