Market Watch: The anatomy of the grey market

In January 2008, lakhs of investors across the country became familiar with the phrase “grey market premium”. After all, the decision to buy into the Reliance Power IPO for many investors was based on this premium. While few understand what this grey market is all about and even fewer actually trade in it, it became the sole basis of investing for lakhs of investors. Not just retail but even for smart HNIs, who borrowed money to scalp this premium on listing.

The grey market thrives in cities like Ahmedabad, Rajkot, Jaipur and Delhi. While there's nothing "official" about grey market trades, they are generally honoured and defaults, if any, are rare. So operators by the name of Kali, Muno, Jindal, Karwaji and Gulshan (possibly fictitious) will take orders of minimum lots of 500 shares and settlement is done in cash. It's so easy for anyone to get access to this market that it baffles me why the authorities have not been able to clamp down on it. Wouldn't the RBI have clamped down on an illegal entity accepting public deposits running into hundreds of crores?

So how big is this grey market? Actual figures are hard to come by but according to sources, the total quantum of trade on Reliance Power in the last few weeks has touched 1 crore shares. That may be a small fraction of the issue size but not insubstantial in itself. What worries me is the scope for manipulation and misleading investors. Without any aspersions on any promoter as such, ask yourself this simple question. If a grey market premium started influencing public consciousness in a manner that had a direct bearing on the level of oversubscription and subsequent listing, would it not be in the interests of a promoter to lay out say 1-2 per cent of the issue size in trying to keep the grey market premium hot and going? So this grey market premium which people mistake as a truly credible and “market determined” price may actually be nothing like it. Also, going by the Reliance Power experience, grey market prices are notoriously fickle. When the Nifty corrected 20% last month, the premium on this IPO tanked nearly 70% from 450 + to 140. The result: HNI’s who had expected a listing above 900 are now praying for 600 for a "no loss" exit.

Here are some bitter truths about the grey market then : it's illegal, unreliable, shallow, possibly rigged and swings wildly with market conditions. Don’t use it, don't trust it, certainly don't use it as a benchmark for buying into an IPO. In the world of money, grey and black aren't good colours, stick to white.