‘Similar to cricket betting’: Amid India’s IPO booms, why investors need to watch out for grey markets

India's booming primary markets have attracted unscrupulous elements who exploit regulatory gaps, leading to the growth of an unofficial grey market for IPO shares. This grey market operates beyond the reach of regulatory mechanisms, often trading shares of companies yet to list. The premium at which these pre-IPO shares trade, known as the grey market premium (GMP), serves as an unofficial indicator of the expected IPO price.

Market stakeholders, including fund managers of mutual funds, take a cue from these GMPs to make investment decisions.

However, this unofficial market practices have raised concerns among genuine investors, who equate grey market activities with illegal "betting activity in cricket matches" and a "parallel black economy". The Small Investors Welfare Association (SIREN) recently presented a representation to the Securities and Exchange Board of India (SEBI), demanding immediate regulatory intervention.

SIREN argues that the widespread publicity surrounding unofficial premiums and application transactions undermines market integrity and SEBI's mandate to maintain a fair, transparent, and orderly market.

The grey market operates through word of mouth, with no paperwork or online activity. Investors buy shares at a premium and, upon listing, may profit or lose based on the share's performance relative to the listing price. While a high GMP can generate expectations of substantial listing gains, it does not guarantee that the share is worth the price investors anticipate receiving after listing. This confusion between speculation and reliable information can be particularly detrimental to small investors.