When an Initial Public Offering (IPO) is made, investors tend to go beyond the issue price and financial statements to evaluate the IPO’s market performance. One such parameter that investors usually take notice of is the IPO Grey Market Premium (GMP). A high GMP creates investor interest, while a low or negative GMP tends to make investors skeptical of an IPO. However, would a high GMP ensure the profitability of the IPO? Should investors use it while deciding whether to apply for an IPO?

Learning IPO GMP will enable investors to gauge the unofficial market sentiment without mixing it up with a prediction of future performance. In this blog, let us see what an IPO GMP is all about.

What Is IPO Grey Market Premium (GMP)?

IPO Grey Market Premium, also known as IPO GMP, is the extra price offered by the buyer in the grey market for the same IPO share over its issue price. IPO Grey market transactions occur outside the stock exchanges and are not part of the official IPO trading procedure. For instance, consider that a firm offers an IPO with an issue price of ₹200 per share. Now, if its GMP is ₹60, then the grey market price would be ₹260. It implies that there may be some people buying shares in the grey market for ₹60 more than the issue price. Nonetheless, GMP is an unofficial figure and does not necessarily mean that the IPO will list itself at ₹260 or give a profit.

How is the IPO GMP Calculated?

The IPO GMP is computed by deducting the IPO issue price from the grey market price.

Formula: IPO GMP = Grey Market Price Estimate − IPO Issue Price

See the example below:

In this case, the GMP is ₹60, which equals 30% of the issuing price.

But this is only the percentage of the premium as it is quoted in the unlisted market. This does not translate to the rate of returns an investor should earn after the issue goes public. The listing price may be different from what the GMP shows.

What Does IPO GMP Indicate?

Some information on the IPO GMP may be helpful in understanding the unofficial market perception about a public issue that is yet to be launched. This is how the GMP is viewed by the investor community.

1. A High GMP Is a Sign of Positive Sentiment
A high GMP could signal the expectation of high demand for the shares of the IPO. This is a consequence of the company’s interest or industry attractiveness or general market conditions. But a high GMP is no evidence of financial strength of the company or attractive pricing of the IPO.

2. A Low GMP Could Be a Sign of Lethargic Sentiment
The low or zero GMP means low investor interest in the unofficial market. The reason for that could be the doubts of the investors concerning the valuation of the company, its growth potential or general market conditions. A low GMP is no guarantee of bad IPO investment opportunity. Long-term potential of the investment is to be defined by the company’s fundamentals and price paid.

3. A Negative GMP Means Unfavorable Investor Sentiment
A negative GMP signals that the unofficial price of the shares is lower than the price of the IPO issue. But still, it does not mean that listing will be losing money for the investors.

How IPO GMP Can Help Investors?

IPO GMP can be considered a valuable tool if used together with other metrics as opposed to being used in isolation for investment decision-making purposes.

• Unofficial sentiment: IPO GMP provides a picture of what some unofficial grey market players think about the upcoming IPO.
• Interest shifts: Monitoring IPO GMP can help detect whether unofficial interest in the IPO grows or fades over time.
• Additional research trigger: Any sudden increase or decrease in GMP can serve as a trigger for additional research on the reasons for such a shift.

For instance, if there is a significant drop in IPO GMP over several days, investors will have good reason to look into subscription numbers, valuation, financial results and general market situation prior to any decisions.

What IPO GMP Cannot Offer Investors

IPO GMP comes with many limitations despite its widespread use.

1. It Cannot Ensure Listed Company Gains
A good GMP value does not mean that the IPO would be listed at a premium because the sentiment towards the market can shift between the subscription period and the listing date due to unexpected events, poor market conditions or demand lower than expected.

2. It Cannot Assess the Financial Health of a Business
IPO GMP cannot measure the growth of the business in terms of revenue, profit, debts, liquidity or sustainability. The company may gain the attention of many speculators but still experience problems in financial terms. Investors need to analyze the finances of the company on their own.

3. It Cannot Determine if IPO Is Undervalued
A good GMP value does not mean that the IPO is undervalued. Investors need to compare the valuation of the company with its earnings, growth, competition and overall environment of the industry.

4. It Does Not Forecast Future Returns
The GMP is based mostly on the informal market expectations surrounding the IPO and does not set the performance of the company for the coming several years. The future gains depend on the company’s development, management, competition, profitability and the price at which the stock will be purchased by the investors.

GMP Influencing Factors

There may be changes in IPO GMP during the subscription process. These factors include:

Demand: If there is high demand for an IPO, its GMP will be high despite any unofficial demand. This is because the official GMP represents investor demand.

Subscription level: There may be a relationship between subscription level and sentiment but the two are different measures.

Fundamentals of the company: Growth in revenue, profitability, prospect of the business and financial soundness may affect IPO sentiment.

Valuation of the issue: There may be interest in IPO where investors feel the issue is fairly valued in comparison to its peers.

Market sentiment: Positive market sentiment will encourage risk-taking behavior while market volatility or negative market sentiments can hurt sentiment.

Industry sentiment: Future prospects of the industry may also impact the interest of investors in the IPO.

These factors interplay in different ways hence affecting GMP despite no change in the business fundamentals of the company.

How Should Investors Make Use of IPO GMP?

The following approach can be adopted by the investors for making better assessments regarding IPO.

1. Knowing the business: The knowledge about how the company makes money, its customers and how it is different from other companies should be known.

2. Checking financial performance: Analyze the revenues, profits, debt and cash flow of the company over various years.

3. Assessment of the valuation: The issue price and valuation should be compared with that of other listed firms having similar characteristics.

4. Assessing the subscription numbers: Subscription figures of various categories of investors must be assessed for gaining insights about the demand of the firm among different kinds of investors.

5. Cautious approach towards GMP: The figure must be taken as an unofficial measure and not a reliable predictor.

6. Assessing your investment objectives: Deciding whether the IPO meets your investment objective.

Don’t Consider GMP Prior to Investment

The IPO GMP could give an idea about the informal market sentiment, but the fact is that it does not provide any indication about the listing gains, company’s financial strength or returns. High premiums might be interesting, while the low ones might be questionable, however, both do not tell the whole truth about the situation. You need to consider the company’s background, performance, valuation and potential prior to making an IPO application. GMP could be considered one of many reference points.

Visit Aetram to find some useful market tools, including the market screeners, watchlists and alerts.

Frequently Asked Questions

1. What does GMP mean in an IPO?
GMP stands for Grey Market Premium. It is the reported additional amount buyers are willing to pay above the IPO issue price in the unofficial grey market.

2. Is a high IPO GMP a good sign?
A high GMP may indicate positive unofficial market sentiment, but it does not guarantee listing gains or establish that the IPO is fundamentally attractive.

3. Can IPO GMP be negative?
Yes. A negative GMP means the reported grey market price is below the IPO issue price. It may indicate weak sentiment, but it does not guarantee listing losses.

4. Where can investors check IPO GMP?
IPO GMP figures are commonly reported by financial websites and unofficial market trackers. Since the grey market is informal, figures may vary between sources and may not be independently verifiable.

5. Should investors apply for an IPO based only on GMP?
No. Investors should assess the company’s fundamentals, valuation, financial performance, risks and investment objectives. GMP should be treated as supplementary information rather than the main basis for an investment decision.