Successful IPOs lead to grey market premium on retail shares

Better-than-expected performance of recent public offerings has evoked a flurry of activity on Dalal Street, albeit behind the scenes, as a number of shares allotted to retail investors are being sold in advance at a premium as high as Rs 90 a piece, industry sources said.

These off-market deals, known as 'Grey Market Premium' among the investing community and viewed as a sign of market prosperity, are done on the expectations that the shares would out-perform their IPO prices when listed on the market, the sources told PTI here.

According to a source who works with Institutional sales division of an FII, as on August 3, the premium offered on the shares of FMCG major Bajaj Corps Ltd was huge, in the range of Rs 85-90. The price band for the issue was Rs 630-660 and it was oversubscribed 19.29 times.

The shares of SKS Micro Finance were offered a premium of Rs 63-65, while shares of State-run Engineers India (EIL) were offered Rs 9-10 premium per share, he said.

Similarly, shares of Midfiled Industries attracted Rs 18-20 above the issue price, while those of Prakash Steelage were offered Rs 3-4 above the issue price.

"Some Institutions and Ultra HNIs are buying these shares at such higher premiums, expecting that these shares will out perform the IPO price band plus the premium they have paid," a top official of a broking firm said.

These buyers think that the value of certain stocks is more than the issue price. So, they start collecting them even before they are allocated by the issue registrar through IPO allotment process, or before the shares are on the stock market, the official said while explaining the modus operandi.

It is mostly brokers who act as middlemen of these grey market deals, as they have the direct knowledge of their clients who apply for such public offers.

In every initial public offer/follow-on public offer (IPO/FPO), the retail buyers take a financial risk as the shares may list below the issue price. When they are offered a premium, most of them normally encash the opportunity.

The middle men may get a commission of 2-2.5 per cent of the premium on an upper side, he said.

On the other hand, sometimes there are more middle men involved and not all know to whom the shares are being sold.

"I have got an offer to arrange 3,000 shares from the retail subscribers of SKS through another broker. The premium offered on SKS was Rs 63," a medium level broker who did not wish to be named told PTI.