Introduction
Grey Market Premium (GMP) is often viewed as a reflection of investor sentiment before an IPO’s listing. It represents the premium investors are willing to pay for shares in the unofficial grey market, offering a preview of how the stock might perform on listing day. While GMP is seen as an early indicator of demand, relying on it as a predictor of long-term success can be risky. GMP often reflects short-term enthusiasm rather than the company’s fundamentals. As such, while it may signal potential gains at listing, its accuracy for long-term performance is questionable.
Understanding about IPO’s
The initial public offering (IPO) is a significant financial event that enables a privately held company to transition into a publicly traded entity. This process involves the sale of shares to the general public for the first time, allowing external investors to buy a stake in the company.
An IPO can represent a strategic move for a company seeking to raise capital for expansion, reduce debt, or facilitate employee stock options. It can also provide liquidity for existing shareholders by allowing them to sell their shares on the public market.
Companies contemplating an IPO must adhere to stringent regulatory requirements set forth by securities commissions and stock exchanges to ensure transparency and protect investors. The IPO process typically involves engaging investment banks to underwrite the offering, conducting due diligence, drafting a prospectus, and marketing the shares to potential investors.
Ultimately, an IPO can offer companies increased visibility, access to capital markets, and prestige, but it also entails significant costs, regulatory compliance, and scrutiny from shareholders and the public.
Categories of Applicants.
Retail Individual Investors (RIIs):
Retail investors apply for shares during an IPO, typically as small-scale individual investors.
In India, RIIs can apply for shares up to ₹2 lakh per application, which qualifies them for retail category allocation.
Retail investors rely on public information and market sentiment, and their portion is often oversubscribed.
Share allocation is typically done on a pro-rata basis or through a lottery system in cases of oversubscription.
Qualified Institutional Buyers (QIBs):
QIBs include institutional investors like mutual funds, banks, insurance companies, and pension funds.
There is no upper limit on the investment amount for QIBs, who often invest in large blocks of shares worth crores (tens of millions).
QIBs are allocated around 50% of total IPO shares and are considered market stabilizers due to their deep analysis and large holdings.
Their decisions are highly regarded by other investors as they access advanced market intelligence.
Non-Institutional Investors (NIIs):
NIIs consist of high-net-worth individuals and corporate entities that apply for shares exceeding ₹2 lakh.
Although there is no upper limit, NIIs typically receive around 15% of the total IPO allotment.
NIIs are more informed than retail investors but do not have the priority access of QIBs.
Employees:
Employees may participate in IPOs through stock purchase plans or preferential allotments.
Their participation is often capped at a specified percentage (e.g., 5-10%) of total shares.
Shares may be offered at discounted rates to incentivize employee loyalty and participation.
| STOCK | GMP ON DAY OF ALLOTMENT | LISTING PRICE | CURRENT MARKET PRICE(AS ON 1ST OCT) |
| WINDLAS BIOTECH LTD. | 80/-(17.39% UPSIDE) | 437(5% DISCOUNT OVER IPO PRICE) | 854(2X OF LISTED PRICE) |
| CARTRADE TECH LTD. | 140/-(8% UPSIDE) | 1600(2.2% DISCOUNT) | 990(38% DOWN) |
| IREDA LTD. | 12(37.50%UPSIDE) | 60(87.5% GAINS) | 230.60(3.84X OF LISTED PRICE) |
| TATA TECHNOLOGIES | 375(75% UPSIDE) | 1200(140% GAINS) | 1095(9% DOWN) |
| ONE97 COMMUNICATIONS | -30(1.40% DISCOUNT) | 1950(9.3% DISCOUNT) | 728(62.67% DOWN) |
Analysis of the above data:
The data presented above provides a comprehensive analysis of the relationship between the listing price, future performance of the script, and the Grey Market Premium (GMP). It is evident from the data that there is a diverse range of indications observed. In some instances, the listing price and future performance of the script exhibited similar trends to the GMP, while in other cases, they showed stark differences.
Interestingly, the data also suggests that the long-term performance of a company may not necessarily align with its performance in the grey market prior to listing. This implies that investors should exercise caution when using GMP as a sole indicator of future performance.
Overall, these findings underscore the importance of conducting thorough research and analysis before making investment decisions. Investors can make more informed choices that align with their investment objectives and risk tolerance by considering a range of factors and not relying solely on the grey market performance.
Recent cases in Primary Market
1) The IPO of Trafiksol ITS Technologies Ltd, an IT company specializing in intelligent transportation systems, has been delayed due to concerns regarding its fundamentals ,balance sheet and proposed use of funds. The company is working to address these issues and set a new listing date. The delay has caused the grey market premium for Trafiksol’s IPO to drop from 135% to 0%. Despite challenges, the company is positive about its future in the IT industry.
2) Adani enterprises FPO recall-: Adani Enterprises in January 2023 initiated a substantial ₹20,000 crore Follow-on Public Offering (FPO) with the primary intent of diminishing existing debts and fostering operational expanses. However, the company encountered unforeseen turbulence as allegations of stock manipulation and fraud surfaced in a report from Hindenburg Research, subsequently leading to a drastic plummet in the company’s stock performance.
Although the FPO garnered full subscription, the market witnessed significant volatility driven by the apprehensions raised in the Hindenburg Report. In response to safeguarding investor interests, Adani Enterprises took the conscientious decision to recall the FPO, ensuring the protection and trust of its investor community.
3) An IPO in the SME segment gained attention when the company claimed in its Red Herring Prospectus (RHP) that it operates in over 27,000 pincodes across India. However, this raised eyebrows, as India has only 19,101 pincodes, casting doubt on the company’s claims.
“Before applying for an IPO, consider this checklist:”
In order to make informed investment decisions regarding an Initial Public Offering (IPO), it is crucial to conduct a comprehensive analysis of various aspects concerning the company.
Firstly, evaluating the sector and overall market growth prospects provides insights into the industry dynamics and the potential for the company’s growth within the market. Understanding the competitive landscape and demand trends is essential for assessing the company’s positioning and future opportunities.
Secondly, scrutinizing the financials of the company is imperative. Analyzing revenue trends, profitability, debt levels, and cash flow offers a deep understanding of the company’s financial health and sustainability. This analysis helps in determining the company’s ability to generate profits and manage its financial obligations effectively.
Furthermore, reviewing the Red Herring Prospectus (RHP) is essential as it contains crucial information about the company’s business model, risk factors, competitive landscape, and future growth strategies. This document provides valuable insights into the company’s operations and potential challenges.
Lastly, assessing the quality of management is paramount. Competent leadership is vital for the company’s success post-IPO as it influences strategic decision-making and execution. Evaluating the leadership team’s track record, experience, and vision is essential in predicting the company’s future performance and growth potential.
Conclusion
In conclusion, while Grey Market Premium (GMP) can provide valuable insights into investor sentiment prior to an Initial Public Offering (IPO), it should be approached with caution as it may not always accurately forecast long-term gains. Our thorough examination of numerous stocks has brought to light the mixed outcomes associated with relying solely on GMP as a predictive tool for post-listing performance. There have been instances where IPOs with high GMPs surged after going public, but conversely, there were cases where stocks either remained stagnant or witnessed declines in value.
It is vital for investors to understand that GMP is just one piece of the puzzle and that various other factors, such as market conditions, company fundamentals, and post-listing investor demand, play pivotal roles in determining the success of an IPO. To make well-informed investment decisions, it is essential to adopt a comprehensive approach that integrates both qualitative and quantitative assessments of an IPO’s potential, rather than solely relying on GMP as a standalone metric.
Ultimately, while GMP can serve as an initial indicator, a holistic analysis is imperative to grasp the complete picture of an IPO’s prospects.
Sources
1) https://www.google.com/finance/?hl=en
4)https://www.moneycontrol.com/ipo/
