Frequently Asked Questions
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1. What is grey market?
Most of the recently-concluded initial public offerings are quoting at significant premia in the grey market, compared to their issue prices, according to players who operate in the unofficial market. These issues are yet to list on the bourses. Market watchers attribute this trend mainly to the buoyancy in the secondary market, and partly to the fact that many of the issues are perceived to have been underpriced. Cities like Ahmedabad, Kolkata and Rajkot are the most active centres for the IPO (initial public offerings) grey market. The grey market is an unofficial market where trading of shares in forthcoming IPOs is conducted. A premium or discount indicates the level of retail interest in a public issue. Trades done in the grey market are settled on the day of listing. As per the rules of the game, once the deal is done at a stipulated price, the seller has to give delivery of shares after he has been allotted the shares by the company. If the seller falls short in receiving the exact number of shares that he has sold in anticipation, then he will have to buy the shares from the market once the share gets listed in order to honour his commitment. Many traders short sell in the grey market if they feel that the premium on offer is unwarranted and that the stock may list at a price lower than what most market players expect it to. Though grey market operators say that there is a constant change in the grey market premium, it largely depends on the subscription on the last day and the market conditions, post issue closing. Example : Grey market premium for the Roman Tarmat issue went up from Rs 28-30 to Rs 110-140. This was because the issue was subscribed around 30 times eventually, after receiving a lukewarm response from investors during the first two days when it was open for subscription. though illegal, the grey market continues to thrive. Investors who bid for an issue normally do not get the full quantity because of the limits for each class. This has resulted in many people "selling" their IPO applications to the grey market operators for a secured interest. Many investors earn a fixed amount - anywhere between Rs 2,500 and Rs 4,000 by selling their IPO applications to grey market operators in Ahmedabad. Though many IPOs are yet to open for subscription, investors might not just need to look at the prospectus when subscribing to IPOs. Street-smart investors would rather look at indicators from the booming grey market before taking a call on IPO investments. It is not only market-savvy investors from Gujarat, but also lead managers to IPOs from Mumbai, Delhi and other parts of the country look at Ahmedabad's grey market premium rates as an indicator of the price at which the issue is likely to get listed. 2. What is an IPO?
When private companies i.e. companies that are wholly owned by their promoters, invite the public to subscribe to their shares, this issue of shares is called an Initial Public Offering (IPO). An IPO is a very exciting time for the company, and IPOs are often eagerly anticipated by the investing public as well. There are several reasons for which a private company may wish to become a public company. The two biggest reasons are to raise capital and to allow the original investors or entrepreneurs who started the company to realize profits on their investment and time. A private company is one in which investment or ownership is limited to select individuals or organizations. A public company is one in which anyone can invest and obtain ownership by purchasing shares on a publicly traded exchange. Undertaking an IPO is a large and exciting event for a new company. A well received IPO means that the company will have cash to further its development and growth. It also usually means that the people who started the company realize some significant profits for their efforts. An IPO requires a great deal of work, from filing the necessary paperwork with the regulatory bodies and writing a prospectus for potential investors to devising and implementing a sales campaign for the sale of the initial shares. Since the company also needs to continue to function and complete its normal activities, a financial firm is usually hired to do this work. This firm is referred to as the underwriting firm for the IPO. For a really large IPO, the work may even be split between several underwriting firms. The investing public is usually excited about an IPO. It is hard to understand why, since most stocks that are sold during an IPO tend to perform badly at first. Some companies also do not survive, so investing in an IPO is more risky and usually less rewarding then investing in more established stocks. Perhaps investors believe the sales hype that usually accompanies an IPO. Perhaps they are excited about being among the first to own the next potential TCS or INFOSYS. Some IPOs do very well right from the start, and it is these IPOs that are remembered. The IPOs that fail are quickly forgotten, while stories of successful IPOs are re-told and their returns frequently exaggerated. Sometimes, investing is like fishing, more hype than fact. 3. What is an FPO?
When an already listed company makes either an offer for sale to the public or a fresh issue of shares, this issue of shares is called Follow on Public Offer (FPO). 4. What is Fixed Priced Issue?
Fixed price issues are issues in which the issuer is allowed to price the shares as he wishes. The basis for the price is explained in an offer document through qualitative and quantitative statements. This offer document is filed with the stock exchanges and the registrar of companies. 5. What is Book-building?
Book-building is a process of price discovery used in public offers. The issuer sets a base price and a band within which the investor is allowed to bid for shares. Take an Example, Yes Bank IPO, the floor price was Rs 38 and the band was from Rs 38 to Rs 45. The investor had to bid for a quantity of shares he wished to subscribe to within this band. The upper price of the band can be a maximum of 1.2 times the floor price. Every public offer through the book-building process has a book running lead manager (BRLM), a merchant banker, who manages the issue. Further, an order book, in which the investors can state the quantity of the stock they are willing to buy, at a price within the band, is built. Thus the term 'book-building.' An issue through the book-building route remains open for a period of 3 to 7 days and can be extended by another three days if the issuer decides to revise the floor price and the band. 6. What is Cut-off price?
Once the issue period is over and the book has been built, the BRLM along with the issuer arrives at a cut-off price. The cut-off price is the price discovered by the market. It is the price at which the shares are issued to the investors. Investors bidding at a price below the cut-off price are ignored. So those investors who apply at a price higher than the cut-off price have a higher chance of getting the stock. So the question that arises is: How is the cut-off price fixed? The cut-off price is arrived at by the method of Dutch auction. In a Dutch auction the price of an item is lowered, until it gets its first bid and then the item is sold at that price. Let's say a company wants to issue one million shares. The floor price for one share of face value, Rs 10, is Rs 48 and the band is between Rs 48 and Rs 55. At Rs 55, on the basis of the bids received, the investors are ready to buy 200,000 shares. So the cut-off price cannot be set at Rs 55 as only 200,000 shares will be sold. So as a next step, the price is lowered to Rs 54. At Rs 54, investors are ready to buy 400,000 shares. So if the cut-off price is set at Rs 54, 600,000 shares will be sold. This still leaves 400,000 shares to be sold. The price is now lowered to Rs 53. At Rs53, investors are ready to buy 400,000 shares. Now if the cut-off price is set at Rs 53, all one million shares will be sold. Investors who had applied for shares at Rs 55 and Rs 54 will also be issued shares at Rs 53. The extra money paid by these investors while applying will be returned to them. 7. Can You Explain Types of investors?
There are three kinds of investors in a book-building issue. The retail individual investor (RII), the non-institutional investor (NII) and the Qualified Institutional Buyers (QIBs). RII is an investor who applies for stocks for a value of not more than Rs 100,000. Any bid exceeding this amount is considered in the NII category. NIIs are commonly referred to as high net-worth individuals. On the other hand QIBs are institutional investors who posses the expertise and the financial muscle to invest in the securities market. Mutual funds, financial institutions, scheduled commercial banks, insurance companies, provident funds, state industrial development corporations, et cetera fall under the definition of being a QIB. Each of these categories is allocated a certain percentage of the total issue. The total allotment to the RII category has to be at least 35% of the total issue. RIIs also have an option of applying at the cut-off price. This option is not available to other classes of investors. NIIs are to be given at least 15% of the total issue. And the QIBs are to be issued not more than 50% of the total issue. Allotment to RIIs and NIIs is made through a proportionate allotment system. The allotment to the QIBs is at the discretion of the BRLM. Lately there have been some complaints by the QIBs of BRLMs resorting to favouritism while allocating shares. The Securities and Exchange Board of India (Sebi) is in the process of reviewing this mechanism. Let's suppose, A Ltd, makes an offer for 200,000 shares. The issue is oversubscribed -- i.e. there is demand for more shares than the issuer plans to issue. Further, a minimum allotment of 100 shares is to be made for every investor. The cut-off price has been decided and now the allotments are to be made. In the RII category, 1,500 applicants have applied for 100 shares each, i.e. there is a demand for 150,000 shares. A Ltd plans to issue 35% of the total issue to this category, i.e. 70,000 shares. In the NII category, 200 applicants have applied for 500 shares each, i.e. 100,000 shares. A Ltd plans to issue 15% of the total issue to this category, i.e. 30,000 shares. The cut-off price has already been decided, so adjusting the quantity remains the only way of reaching the equilibrium. Applying the proportionate allotment system each investor in the RII category will get 46.67 shares [(70,000/ 150,000) x 100)]. But the minimum allotment has to be 100 shares. So through a lottery, 700 investors are chosen and allotted 100 shares each, making a total of 70,000 shares. In the NII category every investor will get 150 shares [(30,000/100,000) x 500)]. And that is how equilibrium is reached. 8. What is Green shoe option?
In case the issue has been oversubscribed, as was the case with A Ltd, the company has to exercise a green shoe option to stabilize the post-listing price. When a particular issue is oversubscribed the appetite of investors for the stock has not been satisfied and once it gets listed they tend to pick up the stock from the secondary market. Since the demand is greater than supply the prices tend to rise way beyond what the fundamentals of the stock would justify. So in order to stabilise the post-issue price of the stock, the issuer has to issue more shares in case of oversubscription. These shares are taken from the pre-issue shareholders or promoters and are issued to the investors who have come in through the public offer on a prorata basis. The green shoe option can be a maximum of 15% of the public offer. 9. Where do you get premiums rates from?
We get premium rates from the grey market of ahmedabad and rajkot. two biggest grey market in the india.Kolkata is the third one. 10. Is Grey Market rates stable all the time?
No Grey Market rates changes time to time or every day according to market sentiments. 11. Does greymarket.co.in deals in greymarket?
No the site provides information only. We provide information for retail investors' benefit. We do not deal in greymarket and we do not know ways and means of doing so. Therefore, visitors to this site are requested not to inquire about "Hows" of greymarket. 12. Does greymarket.co.in provides any other service?
No the site provides information only. We do not provide any other service like buying selling in greymarket. We do not offer any other service. The only service we provide is information. 13. Does "greymarket" exists physically?
No, there is no such thing as greymarket. Unofficial trading is termed as greymarket. 14. What is Kostak Rates?
If a retail investor sells his/her application of Rs 1 lakh in the greyMarket then the premium he/she gets for that application is called 'Kostak Rate'. 14. Explain 'Applications Supported by Blocked Amount (ASBA)'?
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