How IPO Grey Market Works – Retail to Big Bull Brokers

The Indian Grey Market for IPOs which went for a toss after Anil Ambani’s Reliance Power Ltd royal rip off of small investors is thriving back. After the 2005 IPO scam, none want to take chances. This time the system is designed so well, it is out of reach of SEBI because the big fish is not on any official record. We were intrigued to find out the modus-operandi of Indian Grey market this time and here is the finding of our research.

  • The IPO Grey market pyramid is structured that, at the top we have a Sattoriya under whom their are these Regional Brokers who in turn entrust jobs to Sub-brokers with whom the end retail individual investor deals.
  • For the recently concluded Persistent Systems IPO, Sattoriya is BUYING Shares of Persistent systems at a premium of Rs 140 to Rs 150
  • An Ahmedabad based Regional Broker was offering Rs 2,300 / application of Rs 99,200 [also known as ek Lakh ka application, Retail investors must bid to the maximum]
  • The Bangalore based sub-broker was offering Rs 2,100 to retail investors and thus made Rs 200 per application in this deal.
  • The beauty of this Grey market is it runs on TRUST – the sub brokers exact words were – Benami  mein Imandaari Jyada Hota hai 🙂
  • Two Variants in Practice – Sell ek Lakh Ka Application or Sell Shares. [Most wanted to SELL the ek Lakh Ka Application]
  • Once the retail individual investor submits the form, sub-broker passes on the the Application Number to the Regional Broker
  • Rules for Retail Investor in IPO Grey Market – You sell the application [safest way] and hence relinquish all your rights on the shares. Retail Investors selling ek Lakh ka application always make money even if the issue is heavily oversubscribed. [Ir-respective of whether you are allotted shares or not, you get the promised money from your sub-broker] Doesn’t he lose if the issue is oversubscribed ? No. It means the demand has gone further up and listing day price will be still higher, so it gets adjusted.
  • Listing Day – On the day of listing, sub-broker is  given a time and price when he has to SELL all the shares of his retail clients and the Regional broker accumulates.
  • Settlement between Sub-broker and Retail Client – Lets say you have been allotted 20 shares of Persistent systems and your sub-broker sells them at Rs 450 / share. So you make Rs 2,800 profit [ignore brokerage] So final settlement will involve you paying your Sub-broker Rs 700 in CASH, because he had promised Rs 2,100. Now if you have got no allotment, then you just collect Rs 2,100 from your sub-broker and full refund is in your bank account.
  • Settlement between Sub-broker and Regional Broker – Sub-broker passes on Rs 500 / application to Regional Broker
  • Settlement between Regional broker and Sattoriya – The Regional Broker dumps Huge Chunk of shares to the Sattoriya who is now the King Maker in the scrip. Sattoriyas often dump the Block Shares to financial institutions or they’d be acting on their behalf. [Sattoriyas saw huge demand in IL&FS Transportation Network from FIIs]

In a way of speaking, the IPO Grey Market means – Retail Investors are applying on behalf of Big Sattoriyas who are paying a premium to do so without any legal hassle like that in the 2005 IPO scam.

Pitfalls Retail Investors Must be Aware – You will be liable for Short Term Capital Gains Tax, on the profit that you make after Sale. So take care of it, you know how 🙂

2 thoughts on “How IPO Grey Market Works – Retail to Big Bull Brokers

  1. Very well put up. Couple of suggestions:
    1. Can you explain the process if the listing day price goes below the issue price.
    I guess grey market exists only when Sattoriya is confident of share price going above issue price. But, even then there can be many Sattoriya’s and there is guarantee that he is the king.

    2.Whats the price at which FIIs are buying from the regional broker? Why not they buy from the secondary market itself on the listing day?

    3. At a specified time => the transaction is happening in open market. How can we ensure that the shares sold by sub-regional broker are bought by regional broker only? Why would regional broker buy them?

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