23 september 2024 : The grey market premium (GMP) is a key metric that IPO investors in India closely monitor. However, Nilesh Shah, Managing Director of Kotak Mahindra Mutual Fund, cautioned that relying on GMP for investment decisions is akin to prematurely forming a government based on exit poll results. He suggested that the IPO grey market should operate similarly to a “when-issued” market on stock exchanges, where price discovery would occur within regulatory frameworks.
In an interview with Economic Times, Shah remarked that many IPOs get oversubscribed due to prevailing grey market premiums, questioning why such premiums should sway investor decisions. He proposed that if the grey market is to be influential, it should be formalized under stock exchange regulations, eliminating reliance on rumors.
Addressing concerns about the potential manipulation of GMPs, Shah noted that the grey market lacks transparency regarding trading volumes and participants, allowing anyone to circulate misleading figures via platforms like WhatsApp. He likened this to forming a government based solely on exit polls rather than actual election results, emphasizing the risk of making such a mistake.
Shah further illustrated his point by using the example of a potential Swiggy IPO, explaining that shares would trade on stock exchanges prior to listing, allowing for margin trading and clear settlement procedures. In contrast, the grey market presents uncertainty regarding price guarantees and settlement completions. He advocated for converting the grey market into a legitimate, regulated framework, stressing that relying on grey market activity to drive IPO success is unfair and not sustainable.
