How to sell IPO applications in the grey market?

IPO applications are sold on the grey market with the help of local dealers. IPO applications are sold at Kostak Rate or Subject to Sauda price.

Trading on the grey market is done either by trading IPO shares or by trading IPO applications.

Trading in IPO shares is done at the GMP. Let us take an example to understand this. If the IPO issue price is Rs 150 and the GMP is Rs 80, the grey market buyer is willing to pay Rs 230 per share to the seller of the IPO shares. However, if the seller does not receive any shares at the allotment, the deal is cancelled.

IPO applications are traded at Kostak Rate or Subject to Sauda price. If an investor has applied for 100 shares at Rs 150, the value of the IPO application is Rs 15,000. In the grey market, there is an investor who is very interested in the said share and is willing to pay Rs 1,000 as Kostak to buy the entire IPO application. After the commitment, the buyer has to pay Rs 1,000 to the seller irrespective of the allotment. If the seller receives the allotment, he has to pay the listing gains/losses of Rs 1,000 to the buyer or transfer the shares for Rs 1,000 of the IPO application amount.

In the Kostak rate, there is a risk of allotment as the buyer needs to pay the Kostak rate even when the seller does not receive the allotment. So, to secure the risk to some extent comes subject to sauda in the picture wherein the deal is not done until the seller of the IPO application is allotted/receives shares. However, the price of subject to sauda is higher than that of Kostak rates.

Each time a seller and a buyer exchange an IPO application, any associated gain or loss is transferred to the buyer.