IPO reality check! Is GMP a useful signal or just market noise? Here’s what experts think

Investors have long tracked the grey market premium (GMP) of unlisted shares ahead of an initial public offering (IPO) as a proxy for market sentiment. A strong GMP is generally interpreted as a sign of robust investor interest and is often used to estimate the premium at which a stock could list on the exchanges.

However, recent IPO listings suggest that the GMP may not always provide an accurate picture of how a stock will actually perform on debut.

Take the case of Hero Motors. Ahead of its stock-market debut on Wednesday, September 23, the company's GMP had fallen to almost zero from around 16% on September 16, when the issue opened for subscription. Based on the prevailing grey market indications, the stock was expected to list close to its IPO price of Rs 84 a share.


The actual debut, however, told a different story.

Hero Motors shares opened at Rs 82 apiece on both the BSE and NSE, a discount of about 2% to the issue price. The stock subsequently witnessed renewed buying interest and surged nearly 20% from its listing price, hitting the upper circuit at Rs 98.51 on the BSE.

The shares eventually settled at Rs 98.51 on the BSE, significantly above both the IPO price of Rs 84 and the listing price of Rs 82.10.

A similar divergence between GMP expectations and the actual market debut was visible in the case of SBI Funds Management, which made its stock-market debut in July. The shares listed at Rs 613.30 on the NSE, a gain of 6.85% over the IPO price. Interestingly, the listing gain fell short of what the grey market had indicated. Ahead of the debut, SBI Funds Management's unlisted shares were reportedly commanding a GMP of around 16-18%, according to websites tracking grey market activity.

The latest NSE IPO also highlights the volatility of GMP signals. The issue's GMP was around 10-11% on September 17, when the IPO opened for subscription, but had fallen to roughly 3-4% ahead of its listing.

These instances raise an important question: how much weight should investors actually assign to the grey market premium when assessing an IPO's likely listing price and its reception on the stock exchanges?

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GMP offers an indication, but lacks transparency

Market experts say the GMP can provide a broad indication of sentiment in the unofficial market, but investors should be cautious about treating it as a definitive predictor of listing gains.

"The GMP may be considered as a ballpark number having some predictable success rate in estimating listing gains as it is derived from a subset of market participants; hence, a GMP number has a higher degree of prediction probability for listing gains," said Narendra Solanki, Head, Fundamental Research - Investment Services, Anand Rathi Share and Stock Brokers.

However, the lack of transparency around how GMP figures are arrived at remains a key limitation.

On the authenticity and transparency of GMP data, Solanki said there is "no method, no transparency and no traceability" of the number conveyed as a GMP. Adding to the confusion, multiple GMP figures are often circulated in the market, citing different sources.

"Hence GMP fails in this assessment completely and investors should keep this in mind whenever they wish to use GMP as their anchor basis," he said.

Kranthi Bathini, Director, Equity Strategy at WealthMills Securities, also pointed to the speculative nature of the grey market.

"The grey market premium is completely unregulated and, by and large, there is a lot of speculative activity in the grey market. The price discovery mechanism is more speculative in nature," Bathini said.

According to Bathini, the more meaningful indicators for investors are the company's valuations and fundamentals. In the short term, he said, stock markets tend to reflect sentiment and voting behaviour, while over the longer term they tend to weigh a company's fundamentals.

"So, the more exuberance and euphoria that an issue brings, the grey market premiums and the listing gains would be on a higher note," he said.

However, once a stock is listed, the market tends to shift its focus towards the company's valuations, competitive advantages, management quality and growth prospects, Bathini added.

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What if GMP is strong but valuations look stretched?

This creates another dilemma for IPO investors. A strong GMP can suggest robust demand for an issue, but that does not necessarily mean the IPO is attractively valued or that the stock can sustain its listing gains over the longer term.

For long-term investors, Solanki said, the fundamentals of the company and the valuation at which the IPO is offered should remain the most important factors when deciding whether to apply.

"Fundamentals and valuation at which an IPO comes should remain the ultimate/important factor in deciding application for any long-term investors," he said.

Solanki also pointed out that GMP does not necessarily signal that an IPO is cheap or attractively valued. Several other factors can influence the premium commanded in the grey market.

"The GMP does not only signal the IPO's valuation or its cheapness. There are multiple factors because of which a GMP might be higher, for example, size of IPO, demand, valuation, sector/industry, sentiments, promoter pedigree and many more such factors that influence the GMP," he said.

Disclosure: This article has been written by Kumar Gaurav, who is not a SEBI-registered Research Analyst or an Investment Adviser. Gaurav and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here