Retail IPO rush also lights up grey market

Mumbai: The retail stock market frenzy is now sweeping the shores of the IPO market. The public issue of Bengaluru-based digital IT services provider Happiest Minds Technologies was fully subscribed in two hours on the first day itself and the grey market premium of its shares jumped from Rs 110 apiece on Friday to Rs 120 on Monday over the IPO price band of Rs 165-166 per share.

Route Mobile, the cloud communication service provider, which is also launching its IPO on Wednesday, commands a grey market premium of 63%, or Rs 220 apiece, over the proposed issue price of ₹345-350 per share.

The retail quota of Happiest Minds was subscribed by nearly 15 times on Monday with the non-institutional portion subscribed 62%. The quota for qualified institutional borrowers was subscribed just 8%.

The surging interest in these IPOs has been triggered by the success of Rossari Biotech IPO, which was subscribed 79.37 times in mid-July. The company listed on the exchanges at a premium of 58%.

“In both the issues investors who get shares allotted would not only be lucky, but also make money,” said Arun Kejriwal, founder, Kejriwal Research. “Whether they would make money by buying from the grey market looks a little dicey simply because the PE at which they would be buying would make profit a very tough proposition.”

Grey market functions outside the ambit of the Sebi and many investors have lost money through reckless betting. It is open to counterparty risk and the regulator has dissuaded retail investors from participating in these markets. Unlike exchange-traded transactions, where the clearing corporation is the counterparty, the grey market is open to default by the other party as it largely runs on trust.

The Kostak rate for Happiest Minds — the amount an investor stands to gain irrespective of allotment status by selling his IPO application in the grey market — was Rs 425 per application. The Kostak rate for Route Mobile is Rs 900 per application while the ‘subject to sauda’ price is Rs 9,000 per application.

The subject to sauda (SS) — or subject to allotment — rate for Happiest Minds is quoting at Rs 7,000 per application in the grey market. An investor can sell his application to a buyer at a price before IPO shares are listed in the stock market. In the case of Happiest Minds, the gain will be Rs 7,000 if there is allotment and zero if there is no allotment.

The buyer will make a profit of Rs 3,800 if the IPO lists at a premium of Rs 120. The profit is calculated by multiplying the premium with the lot size (90) minus the cost (Rs 7,000).

In the grey market, investors with a demat account have to apply for the IPO and give the application number to the broker/buyer who tracks the allotment details from the registrar. The actual transaction and settling the trade will be done on the listing day under the supervision of the broker. As currently all the applications are made through online, the tracking of allotment is simpler.

“The success of Rossari Biotech, over 40 lakh new demat accounts that are opened in the last six months and ample liquidity are the main reasons for such a huge demand for IPOs,” said Narottam Dharawat, founder of Mumbai-based Dharawat Securities which deals in unlisted shares. “Most of the newly added demat accounts are from short-term investors and they are very active in IPOs as well.”