What is the Grey Market Premium ( GMP ) in an IPO?
Grey Market Premium (GMP) refers to the premium that investors are willing to pay over the issue price. The issue price is the price at which shares are offered for sale before they are officially listed on the stock market.
The grey market premium is prevalent in the IPO grey market. The IPO grey market is the unofficial market where IPO shares or applications are bought and sold before they are officially launched or available for trading in the stock market.
The grey market premium helps gauge the interest of investors in a particular IPO depending on whether it is negative or positive. GMP reflects on how the IPO might perform on listing day.
As it is with stock prices, the grey market premium for an IPO is based on the demand and supply of the stock. If the subscription numbers for a particular IPO are less than the number of shares they have offered in the IPO, then the GMP will be lower. On the other hand, if the subscribers are higher than the number of shares they have offered in the IPO, the GMP will be higher.
For instance, a pharma company, Pharm-Me has decided to come out with an IPO to raise capital for expansion. It is offering 10,000 shares as part of the IPO. However, it receives subscriptions for 9,000 shares. In this situation, the GMP will be lower. If it had received over subscriptions of over 10,000 shares, say 13,000 shares, the GMP would be higher.
Let’s understand GMP with examples
A home décor company, Adorn, has decided to go public with an IPO. The company has a vision coupled with a decent volume and sales growth due to the uniqueness of its products. What’s more, it has strong fundamentals.
Adorn has decided to offer 1 lakh shares. As the IPO is routed through the book-building process, the cut-off price is fixed at Rs. 250 after the bidding window is closed. Adorn’s IPO gets a subscription of 1.5 lakh shares. Due to its popularity, the GMP is Rs. 100. This means investors in the grey market are ready to pay Rs. 350 (Issue price of Rs. 250 + GMP of Rs. 100) for Adorn’s share. This is an example of a company with a positive GMP.
Conversely, the real estate enterprise El Cemento has also decided to offer its shares to the public through the IPO route. Though growth is slow for the time being, they wish to expand their operations through IPO proceedings.
It decided to offer 50,000 shares to the public to raise funds through its IPO. Again, as the IPO is routed through the book-building process, the cut-off price is fixed at Rs. 120 after the bidding window is closed. However, El Cemento’s IPO receives subscriptions of 45,000 shares. Since the number of share subscriptions are lower than the total number of shares offered, the GMP in the grey market is in negative territory. So, the GMP is – Rs. 50. This means investors in the grey market are ready to pay Rs. 70 (Issue Price of Rs. 120 + GMP of – Rs. 50) for El Cemento’s share. This is an example of a company with a negative GMP.
The GMP could be regarded as a signaling mechanism as it is a fair indicator of the demand for the IPO. However, because of the very nature of the grey market, there is a possibility that the GMP could be manipulated.