Listing-day gains in recent initial public offerings (IPOs) have triggered a revival in grey market premiums. In fact, all the IPOs awaiting listing are trading above their offer price in the grey market.
The grey market involves unofficial buying and selling of shares a few days before the actual listing of the IPO on the stock exchanges. Rates here are often seen as an indicator of market expectations from the IPO. United Bank of India is trading at a 15% premium to the upper end of its offer price band (Rs 60-66).
Similarly, the grey market premium for DQ Entertainment is 62% and it is 39% for Persistent Systems. IL&FS Transportation Networks Ltd (ITNL) is trading at a 15% premium while Pradip Overseas is at 16%, according to market sources.
“The grey market activity has picked up owing to the listing-day gains that many recent public issues have seen. These gains entice more investors to step in,” said Kishor Ostwal, CMD, CNI Research. The 16 companies that have listed so far this year have posted listing gains of 14.9% on average. ARSS Infra was the top performer, with a gain of 63.6%.
Listing day gains are important as many high-networth individuals, on whom most of the grey market depends, buy into IPOs on borrowed funds. Money is borrowed at an average interest rate of 1-2% for a period of up to 1 month. Once the company lists, the shares are sold to settle the loan and book profits. So, if a stock is offered at Rs 100, then it would have to show gains of at least Rs 2 for the investor to break even.
Grey-market activity had fallen off after a number of high profile issues failed to impress in the latter half of 2009.
However, experts warn that the premium that issues in these unregulated trades enjoy can be easily subject to manipulation. Since many investors take their cues from the grey market premium that shares of an issue command, there is often an effort to drum up interest in order to attract greater interest in the issue. Post the issue, grey market demand and the premium often disappear.
“Grey market premiums don’t guarantee listing-day gains, so investors would be advised to study the track record of promoters and merchant bankers of the issue,” said Arun Kejriwal, director, Kejriwal Research & Investment Services.
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