Have you ever heard about people buying IPO shares before they are even listed on the stock market? That happens in the grey market.
The grey market in India refers to an unofficial market where shares or IPO applications are bought and sold before they are officially listed on stock exchanges like NSE or BSE. It is not illegal, but it is not regulated by SEBI either.
People participate in the grey market mainly to earn short-term profits, especially during hot IPO seasons. This market works based on trust between buyers and sellers. There are no formal contracts, and most transactions happen in cash.
For beginners, it’s important to understand what is grey market, how it works, and the risks involved. This guide will explain the types of grey market activities, the concept of grey market premium (GMP), common terms like Kostak and Subject to Sauda, and how to read market trends.By the end of this blog, you’ll have a clear idea of the grey market, its purpose, and whether it’s something you should consider as an investor.
What is grey market in the stock market? Simply put, it is a parallel market where shares or IPO applications are traded before the stock is officially listed on exchanges like NSE or BSE.
The grey market is unofficial and unregulated, which means it does not follow the rules of SEBI or any stock exchange. It runs entirely on trust and is usually operated by dealers or brokers in cash transactions.
Let’s say a company launches its IPO at ₹100 per share. Before the shares are allotted or listed, people start buying and selling those shares in the grey market for ₹130. This ₹30 extra is called the grey market premium. We’ll cover that in the next section.
This market exists mainly for those who want to:
Although the grey market is not officially allowed, it is widely followed to judge market sentiment about an IPO.
The term “grey” is used because this market is neither black (illegal) nor white (legal and regulated). It operates in a legal grey area, it’s not banned, but it’s also not officially recognized.
Now that you understand what is grey market, let’s explore the different ways it operates in the Indian stock market. While all types share one common factor—unofficial trading—they differ in terms of what is actually being traded.
This is the most common type. It involves trading IPO shares before they are listed on the stock exchange. People who expect the IPO to perform well start buying shares in the grey market at a premium price.
Example:
If the IPO issue price is ₹150 and the grey market premium (GMP) is ₹50, then the shares are traded unofficially for ₹200.
Investors use this price to estimate the listing price of the IPO.
Instead of buying shares, some traders buy entire IPO applications. This is known as a Kostak deal. It allows applicants to sell their right to apply, even before knowing whether they’ll get allotment.
Example:
You apply for an IPO and sell your application in the grey market for ₹1,500. If you get allotment, the buyer gets the shares. If not, you still keep the ₹1,500.
This protects you from the risk of not getting allotted shares, while giving the buyer a chance to earn on listing.
This type of deal happens only if allotment is received. The deal becomes valid “subject to allotment.” If the seller doesn’t get allotted shares, the deal is cancelled.
Example:
You agree to sell allotted shares for ₹2,000 in the grey market, but the deal only goes through if you actually get those shares. Otherwise, no money is exchanged.
Although unrelated to stocks, the grey market is also used in the context of physical goods—like smartphones or electronics sold through unauthorized channels. This is different from the IPO grey market and is mentioned here only for clarity.
When discussing the grey market, one term that often comes up is Grey Market Premium (GMP). If you’re new to IPO investing, understanding what is grey market premium is crucial, because it plays a big role in shaping expectations around a company’s listing price.
The grey market premium is the extra amount investors are willing to pay over the official IPO issue price for a company’s shares, before they are listed on the stock exchange.
This trading takes place in the grey market, which is an unofficial and unregulated space outside the NSE and BSE. The GMP is decided purely by demand and supply in this informal market.
Let’s say a company launches its IPO with a price of ₹100 per share.
Now, in the grey market, there’s strong demand for these shares, and investors are ready to pay ₹150 per share before listing. That ₹50 difference is known as the grey market premium.
So, if:
Investors use this number to estimate what the stock might list at once it hits the exchange. While this isn’t a guarantee, it helps set expectations.
The grey market premium gives an early signal of how the market feels about the IPO. A high GMP usually means:
However, a low or falling GMP may signal weak interest and potential underperformance.
Several factors influence the grey market premium in India:
While GMP is a useful tool, it’s not always reliable. Since the grey market is unregulated, premiums can be manipulated to create fake hype.
Example:
An IPO may show a grey market premium of ₹80, but due to negative news or weak results, the stock may list at just ₹95 (only ₹5 above the issue price). This results in disappointment for those who relied only on GMP.
So, GMP should be seen as a market sentiment indicator, not a promise of profit.
Also Read: What is Grey Market Premium in IPO?
When learning about the grey market, it’s important to understand two more terms that are frequently used: Kostak Rate and Subject to Sauda. These are related to grey market IPO deals and help investors book profits even before allotment happens.
The Kostak Rate is the fixed amount a buyer is willing to pay for an entire IPO application in the grey market, regardless of whether shares are allotted or not.
This deal is made purely based on trust and usually takes place in cash. It allows the seller to lock in a profit, without caring about allotment or listing outcomes.
Let’s say you apply for an IPO worth ₹15,000 and someone offers you a Kostak Rate of ₹1,200 in the grey market. You agree, and sell your application to them. Now:
In short, Kostak Rate protects sellers from the risk of not getting allotment, while buyers are betting on potential listing gains.
A Subject to Sauda deal is different from the Kostak deal. In this case, the agreement is valid only if the shares are allotted.
This means the seller agrees to sell the shares at a pre-decided price in the grey market, but only if they receive the allotment.
You agree to sell your allotted IPO shares at ₹2,000 profit under a Subject to Sauda deal. Now:
This is a conditional deal based on the outcome of the IPO allotment.
Many IPO investors in India follow grey market trends closely. These trends, especially the grey market premium, can provide early signals about how the IPO might perform when it lists. However, since the grey market is unregulated, it’s important to know how to interpret these signals wisely.
Although the grey market operates informally, several websites and platforms track live grey market premiums for upcoming IPOs. Some of the most followed sources include:
These sites show:
When you see a grey market premium, it reflects the amount of unofficial interest in the IPO. The higher the GMP, the stronger the expected listing gain.
Example:
Let’s say an IPO has:
This means investors expect it to list around ₹180 (₹120 + ₹60).
However, you must look beyond the number and focus on:
If the grey market premium starts falling just days before listing, it may signal:
A falling GMP should be treated as a warning sign, especially if you were applying only for short-term listing gains.
Yes. Since the grey market is not under SEBI’s control, some traders or dealers may inflate the GMP artificially to create hype around an IPO. This is more likely in small or low-quality offerings.
Red Flag Example:
An IPO shows very little interest in official subscription data, but the GMP is shown as ₹100. This could be a trap for retail investors.
Always verify GMP with:
One of the most common questions beginners have is: “Is the grey market legal in India?” The answer lies in a grey area, just like the market itself.
The grey market is not officially recognized or regulated by SEBI (Securities and Exchange Board of India) or any Indian stock exchange. That means:
However, trading in the grey market is also not classified as illegal. It isn’t punishable unless it involves fraud, manipulation, or insider trading.
This is why the grey market is called “grey”—it sits between legal and illegal. It exists due to high investor demand for early access to IPO shares, and it functions based purely on trust.
SEBI and stock exchanges only regulate official transactions that happen:
The grey market doesn’t follow these protocols. Deals are often:
So, SEBI doesn’t interfere—but it also doesn’t protect you if the deal fails.
While the grey market might seem attractive—especially when you see high grey market premiums—it carries serious risks. Since it is unregulated, informal, and based purely on trust, even experienced investors can face losses.
If you’re a beginner, understanding these risks will help you make smarter investment decisions.
The biggest risk in the grey market is the absence of any legal backing. Since trades don’t happen through registered brokers or official exchanges, you cannot take legal action if a deal falls through.
Example:
You agree to sell your IPO application under a Kostak deal for ₹1,200. The buyer later refuses to pay. You can’t go to SEBI or the police—because the transaction was never officially recorded.
Every grey market deal depends on trust between two individuals. If the other party backs out, delays payment, or changes the deal, you have no way to recover your money.
This kind of counterparty risk is especially high in:
A rising grey market premium might give you the impression that the IPO will list at a much higher price. But this number is not official and can be manipulated.
Sometimes, traders inflate GMPs on social media or Telegram groups to generate artificial excitement.
Example:
An IPO has a grey market premium of ₹70 one day before listing. On listing day, it opens at just ₹5 above the issue price. Investors who bought based on the GMP lose money.
Grey market prices change every day, sometimes multiple times a day. This makes it risky to rely on GMP when making decisions.
Factors that cause volatility:
Most grey market transactions happen in cash. This adds several layers of risk:
Also, cash transactions can raise concerns from a tax and compliance perspective.
Many newcomers fall into traps set by fake grey market dealers who promise big returns. These individuals vanish after taking payments, leaving investors with nothing.
Always remember: grey market trading is not for beginners. Unless you fully understand the system and trust the people you’re dealing with, it’s better to stay away.
While the grey market might seem attractive—especially when you see high grey market premiums—it carries serious risks. Since it is unregulated, informal, and based purely on trust, even experienced investors can face losses.
If you’re a beginner, understanding these risks will help you make smarter investment decisions.
The biggest risk in the grey market is the absence of any legal backing. Since trades don’t happen through registered brokers or official exchanges, you cannot take legal action if a deal falls through.
Example:
You agree to sell your IPO application under a Kostak deal for ₹1,200. The buyer later refuses to pay. You can’t go to SEBI or the police—because the transaction was never officially recorded.
Every grey market deal depends on trust between two individuals. If the other party backs out, delays payment, or changes the deal, you have no way to recover your money.
This kind of counterparty risk is especially high in:
3. Unreliable Grey Market Premium
A rising grey market premium might give you the impression that the IPO will list at a much higher price. But this number is not official and can be manipulated.
Sometimes, traders inflate GMPs on social media or Telegram groups to generate artificial excitement.
Example:
An IPO has a grey market premium of ₹70 one day before listing. On listing day, it opens at just ₹5 above the issue price. Investors who bought based on the GMP lose money.
Grey market prices change every day—sometimes multiple times a day. This makes it risky to rely on GMP when making decisions.
Factors that cause volatility:
Most grey market transactions happen in cash. This adds several layers of risk:
Also, cash transactions can raise concerns from a tax and compliance perspective. Keep in mind, GMP is taxable—whether the deal is in cash or not.
Many newcomers fall into traps set by fake grey market dealers who promise big returns. These individuals vanish after taking payments, leaving investors with nothing.
Always remember: grey market trading is not for beginners. Unless you fully understand the system and trust the people you’re dealing with, it’s better to stay away.
Now that you know what is grey market, how it works, and the risks involved, the next logical question is: Should you invest or trade in it? The answer depends on your experience level, risk tolerance, and investment goals.
Let’s break it down.
If you’re new to the stock market, it’s best to avoid grey market trading altogether. Here’s why:
Instead, stick to applying for IPOs via official platforms like your stockbroker or trading app using ASBA (Application Supported by Blocked Amount). It’s safe, transparent, and backed by SEBI.
Seasoned traders with market knowledge and trusted contacts may consider grey market activity for short-term gains, especially during high-demand IPOs. But even then, it’s critical to:
Even experts treat grey market trades as speculative—never invest money you can’t afford to lose.
Avoid grey market participation if you notice:
These are common signs of manipulation or fraud.
One common myth is that a high grey market premium means assured listing gains. That’s not true.
Example:
An IPO may show a GMP of ₹60, but if the stock markets fall sharply before listing day, the IPO may open flat or even below the issue price.
Always remember: the grey market reflects sentiment, not certainty.
The grey market is an unofficial place where IPO shares or applications are bought and sold before they get listed on the stock exchange. It’s not illegal, but it’s also not regulated by SEBI. Everything happens off-record and is based on mutual trust.
The grey market premium is the extra amount investors are willing to pay over the IPO issue price. It gives an idea of the market sentiment before listing.
Example:
If an IPO is priced at ₹100 and the GMP is ₹40, people expect it to list at ₹140.
The Kostak rate is the price at which an investor can sell their entire IPO application in the grey market, whether or not they receive allotment.
Example:
You sell your application for ₹1,000. Even if you don’t get allotment, you keep the ₹1,000.
Subject to Sauda is a deal that only goes through if shares are allotted. If the person doesn’t receive allotment, the deal is cancelled and no money is exchanged.
No, the grey market is not officially legal, but it’s not illegal either. It exists outside the regulatory system. You have no legal protection if something goes wrong.
You can use grey market premium as a reference, but don’t rely on it completely. GMP can be manipulated and doesn’t guarantee listing gains.
Example:
An IPO with a GMP of ₹70 may still list flat or at a loss if the market turns negative.
Several websites track live grey market premiums, such as:
These platforms also show Kostak rates and Subject to Sauda deals for ongoing and upcoming IPOs.
Yes, absolutely. In fact, most investors apply for IPOs through:
This is safe, SEBI-regulated, and does not involve any grey market activity.
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