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

Booming primary markets at times attract unscrupulous elements seeking to take advantage of the euphoria. In India, an unofficial IPO market is gaining traction as public offers — big and small — line up to raise funds from investors. Such a grey market takes advantage of regulatory gaps and operates beyond the reach of established regulatory mechanisms, say market stakeholders.

In the grey market, shares of companies that are yet to list are traded. These markets are operated by players in Ahmedabad, Jaipur and Rajkot, according to sources in the official stock exchanges. The premium at which these pre-IPO shares trade i.e., the grey market premium (GMP), becomes an unofficial indicator of the premium at which IPO shares are purportedly expected to trade. Market stakeholders, who did not wish to be named, said even fund managers of mutual funds take a cue from these GMPs.

Genuine investors worry about such practices and equate them with illegal “betting activity in cricket matches” and a “parallel black economy”. With a vibrant primary market, the scale of such unofficial speculative activity has risen, with IPO applications being ‘trafficked’ and premiums getting inflated. This, at times, encourages retail investors to mistake market hype for genuine demand, market players said.

In an October 21 representation to the Securities and Exchange Board of India, the Small Investors Welfare Association (SIREN) has called for immediate regulatory intervention, arguing that the widespread publicity surrounding unofficial premiums and application transactions raises serious questions about market integrity and the effectiveness of existing safeguards.

“What was previously a covert activity is now conducted in broad daylight across WhatsApp, Telegram groups and public tracking portals and others. This open black market makes a mockery of SEBI’s mandate to maintain a fair, transparent and orderly market,” said Arun Goenka, founder president, SIREN.

Sebi did not respond to queries from The Indian Express on the thriving illegal grey market. Market players said the government and the regulator are aware of the grey market. “It is an illegal activity just like gambling or betting. Is it for SEBI to act or the state police or other law enforcement agencies? It is a question for all,” said a stakeholder who did not wish to be named.

Parallel market in the shadow of regulation

The grey market operates outside recognised stock exchanges, with transactions typically taking place through informal arrangements between buyers and sellers. GMP figures are neither official exchange prices nor guaranteed indicators of the eventual listing price, but they do influence investor sentiment, said market players.

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A high premium can create expectations of substantial listing gains, encouraging investors to subscribe to an IPO without adequately examining the company’s valuation, financial performance, business risks or prospects.

Retail investors who rely on such illegal markets to make investment decisions do so at their own risk, said a market player. But the promise of high gains continues to be a pull and unsophisticated investors get lured. Some take loans and some commit their hard-earned savings to invest. “When unofficial numbers are widely circulated, investors may interpret them as evidence of strong demand even though they do not necessarily reflect verified orders or actual subscription figures,” the association said.

How does the grey market operate?

It operates by word of mouth. There’s no paperwork or online activity. An investor buys one share of XYZ with an issue price of Rs 1,000 at a premium of Rs 300. After listing, if the share is quoted at Rs 1,400, he gets a profit of Rs 100 from the seller. On the other hand, if the share lists at a discount of Rs 1,200, he will lose money and pay Rs 100 to the seller. “Only the difference is paid. There’s no transfer of shares or possession of shares. It’s like betting in cricket matches. This is unofficial and illegal… and there’s no legal sanctity,” said an investor.

Small investors could pay the price

SIREN has drawn parallels with the frenzy surrounding the Reliance Power IPO years ago, warning that expectations of spectacular listing gains can leave retail investors exposed when market reality fails to match the hype.

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Reliance Power shares were trading at huge premium pre-listing, but the stock crashed upon listing, going almost Rs 100 below the offer price of Rs 450 per share (Rs 400 for retail investors after Rs 50 discount).

This showed that an IPO is not a guaranteed route to listing gains. Nor does a high grey market premium establish that a share is worth the price investors expect to receive after listing. For smaller investors, the consequences of confusing speculation with reliable information can be particularly severe.

Can SEBI leave the questions unanswered?

SIREN has urged SEBI to choose between two broad approaches: enforce the law decisively against unlawful activity or examine whether a transparent, regulated mechanism could accommodate legitimate pre-listing entitlement transactions.

Under its enforcement proposal, the association has called for action against operators involved in illegal transactions, scrutiny of platforms publishing unofficial rates and investigation of financial channels allegedly used for such activity. Market players are not sure if SEBI is the right agency to wield its stick on such an illegal market.

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The other alternative is to examine if certain transactions could be formalised through recognised market infrastructure, subject to appropriate safeguards. Such a proposal would require careful legal and policy examination; it does not mean that all grey market activity can automatically be treated as illegal or that formalisation would eliminate manipulation.

The central issue is not whether every unofficial premium is fraudulent. It is whether unlawful trading, deceptive promotion or manipulation is taking place and whether the authorities have adequate tools to detect and deter it.

“SEBI’s position on the legality of different forms of grey market activity, the scope of its surveillance and enforcement efforts, and the possibility of investor advisories is therefore important. A response would help distinguish permissible conduct from potentially actionable violations,” said a market observer.