Pre-IPO premiums zoom as punters play hard

MUMBAI: The Chinese stock market boom has driven cab drivers and gardeners in China to quit their regular jobs to turn into full-time punters. If the boom in the Indian IPO market sustains its current momentum, chances are more and more people would park their savings and divert cash from business to make quick money on listing.

Already, many small- and mid-sized companies are delaying payments to their suppliers to play the market. And, well before the IPO subscription forms are available, the game starts in the grey market, which has its own rules, pricing justification and trading structure.

IPO premiums in the grey market have been soaring as the market seems to believe that any banking or loan market crisis in the US can only lead to more money flowing into India, as rate cuts to bail out institutions will improve liquidity. What is also pushing up the premium is the record subscription numbers of recent offerings.

“IPO market is mainly buzzing because of the bullish sentiment in the secondary market,” says a Mumbai-based broker who tracks the IPO grey market on a daily basis. However, he also cautions that in cases where the issue has opened for subscription, a clutch of operators often put high bids to influence the grey market price.

Cities like Kolkata, Ahmedabad and Rajkot have the most active grey markets. This is an unofficial market where trading of shares in forthcoming IPOs is conducted. A premium or discount is the market’s estimate of how much the stock of a company is likely to soar (or dip) when they are traded on the day of listing.

For instance, Edelweiss Capital is currently trading at a premium of Rs 800 in the grey market, signalling that market participants expect the issue to list at a price upwards of Rs 1,600 (The price band for the issue is Rs 725-825).

Since Sebi does not allow shares to be transferred before the day of listing, trades done in the grey market are only settled on the day of listing. In fact, the grey market has become so vibrant that a few brokers in the above cities have taken to exclusively dealing in the grey market. These brokers, often work hand-in-hand with promoters and in the process also control the prices at which issues list.

A small dip in the interest rate has also helped. Earlier most banks had reached their limits of lending for investing in IPOs. With interest rates coming down, there are more takers for IPO financing. NBFC arms of several broking houses have also taken up lending in a big way, prompting investors to flock towards IPOs.