PowerGrid issue charges up grey market

Grey market operators have worked out the rates on expectations that the stock would trade at least above Rs 92 after the follow-on offer

The buzz surrounding the follow-on public issue of state-owned Power Grid Corporation has revived activity in the grey market. Operators in this unofficial market are offering an upfront sum of anywhere between Rs 5,300 and Rs 6,000 to retail investors, who will get shares in the offer at a 5 per cent discount to the issue price. The issue, which opened on Tuesday and will close on Friday, has been priced in the band of Rs 85-90 a share.

About 27.4 million of the 78.4 million shares on offer have been set aside for retail investors. The grey market rate depends on the size of the application; a retail investor who applies for a maximum of 2,100 shares is getting as much as Rs 6000 for ‘selling’ the application form to the operator. An application falls under the retail investor category if the value of the application is less than Rs 2 lakh.

Grey market operators have worked out the rates on expectations the stock would trade at least above Rs 92 after the follow-on offer. The stock closed at Rs 93.75 on Tuesday.

So, if the cut-off price is fixed at Rs 90 — the upper end of the price band — retail investors would get the shares at Rs 85.5 apiece. Retail investors would get about Rs 6.5 a share, without any risk, if PowerGrid shares trade above Rs 92 after the issue. Grey market operators, mostly in Mumbai, Gujarat and Rajasthan, are looking to pocket this easy price differential that retail investors enjoy.

“In the short term, the stock is expected to retrace back to its pre-FPO level of Rs 110-115,” says Arun Kejriwal, head of Mumbai-based investment consultant KRIS.

An assumption these operators are making in offering these rates is that the retail category will get subscribed about twice.

“The issue size is big and it is unlikely that investors will apply aggressively to this FPO,” said an Ahmedabad-based grey market operator. “Even if we give investors Rs 6,000 per application, we can easily get Rs 2 a share after the costs,” he said.

For the operator, volumes are crucial. A profit of Rs 2 a share may appear paltry to an individual retail investor, but the profits run into crores of rupees for operators, because they buy multiple applications.

These operators are also approaching retail investors to rent out their demat accounts for about 20 days for a fee. This is after Sebi last year said retail investors applying for shares in public offers would get assured allotment of a minimum lot.