Quick Answer

The IPO grey market is an unofficial space where people trade IPO applications and shares before the stock lists on NSE or BSE. It has no SEBI backing. Two routes let a seller earn money without holding shares till listing: the Kostak rate, a fixed payout no matter what happens at allotment, and Subject to Sauda, a bigger payout that only comes through if shares actually get allotted. Neither has legal protection. If the other party does not pay, you have no one to complain to.

What Is the IPO Grey Market
When Does the Grey Market Open and Close
Who Sets the GMP and Kostak Rates
How the IPO Grey Market Works
Key Features of Grey Market Trading
Advantages
Risks and Limitations
Tips for Beginners
Kostak Rate vs Subject to Sauda vs GMP
Common Mistakes to Avoid
Who Should Use This
Conclusion
Frequently Asked Questions

What Is the IPO Grey Market

The IPO grey market is an unofficial place where people buy and sell IPO applications and soon-to-be-listed shares before the stock officially lists on NSE or BSE. It sits between white, which means legal and regulated, and black, which means illegal. That is where the name comes from. No law bans it. But SEBI and the exchanges do not recognise it, and they offer no protection if something goes wrong.

This market exists for a simple reason. IPO demand becomes visible days before the actual listing, once subscription numbers start coming in. Some applicants want to lock in a profit right away instead of waiting. Some investors want early exposure to a popular IPO without applying themselves. Small brokers and individual dealers connect these two sides. Deals happen over a phone call or a chat message, and money changes hands mostly in cash.

Three terms drive every conversation here.

Grey Market Premium, or GMP
The extra amount buyers pay over the issue price for one share.
Kostak rate
A fixed amount paid for an entire IPO application, whether or not it gets allotted shares.
Subject to Sauda
A bigger, conditional amount paid for an application, but only if it actually gets allotted shares.

New to IPOs altogether? It helps to understand how to apply for an IPO first, before these grey market terms start making sense.

When Does the Grey Market Open and Close

Grey market trading typically starts the moment an IPO’s price band and dates are announced. That is when dealers and applicants first have enough information to set a rate. Activity usually picks up through the subscription period and continues right up to listing day.

There is also a specific window worth knowing. Once bidding closes, allotment is usually finalised within a couple of working days, and shares list roughly three working days after the issue closes. SEBI has been discussing a regulated “when listed” facility to formally cover trading during exactly this gap, so that it eventually moves out of the informal grey market and onto a supervised platform. You can read SEBI’s own investor education material on avoiding unregulated trading practices on the SEBI Investor Education portal.

Who Sets the GMP and Kostak Rates

There is no official price board for any of this. Local dealers, mostly based out of financial hubs like Mumbai, Ahmedabad, and Jaipur, quote a rate based on what they hear from buyers and sellers that day. IPO subscription data usually comes in three separate buckets: retail investors, high net worth individuals, and institutional buyers. A dealer often reacts to the retail or high net worth number specifically, since a strong showing in either one signals real appetite, not just the blended total.

These rates are not fixed. A GMP quoted in the morning can look different by evening, especially for an IPO getting heavy attention. Treating a single GMP number as a guarantee is a mistake. It is a snapshot of demand at one moment, set informally by a small group of dealers, not a verified price.

How the IPO Grey Market Works

People trade in this market in three distinct ways.

Trading in GMP, buying and selling shares themselves Once an IPO’s price band is out, dealers start quoting a premium over the issue price. A buyer pays issue price plus GMP per share. If the seller’s application gets allotted, the shares, or the profit, get handed over near listing. If there is no allotment, this particular deal usually falls apart, since there is nothing to hand over.
Selling at the Kostak rate, selling the application itself An applicant sells their entire application for a fixed lump sum, before allotment results are out. The buyer pays this amount regardless of outcome. Get allotted, and the buyer keeps whatever the shares are worth at listing, gain or loss. Get no allotment, and the buyer still pays the agreed Kostak amount. The seller’s profit is fixed the moment the deal is struck.
Selling Subject to Sauda, a conditional version of Kostak Same idea as Kostak, but the payout only happens if allotment comes through. The rate is higher than Kostak because the buyer is taking on the “no allotment” risk. No allotment means the deal is cancelled and nobody pays anybody.

None of these three involve an exchange, a clearing house, or a SEBI registered intermediary. Every deal runs on one person trusting another to pay up once results are out. If you want to skip this uncertainty altogether, you can check your IPO allotment status directly through the NSE, BSE, or the registrar’s website once results are out.

Key Features of Grey Market Trading

Unofficial and unregulated. No exchange, no SEBI registration, no clearing mechanism, at any point.
Settled on trust, mostly in cash. Deals happen over phone calls or messaging apps, with money changing hands in cash.
Three separate rate types. GMP prices a share. Kostak and Subject to Sauda price the entire application.
Tax stays with the original applicant. The application and shares sit in the original applicant’s name and PAN. Any capital gains tax bill legally belongs to them, not the grey market buyer.
Prices move on sentiment, not fundamentals. Rates shift with subscription numbers and rumour, none of it checked by SEBI.

Advantages

Kostak suits applicants who want certainty. The payout is fixed the moment the deal is struck, no matter what happens at allotment or listing.
Subject to Sauda suits someone chasing a bigger payout who accepts getting nothing if there is no allotment. It can also work out cheaper than buying shares outright once they are already listed.
GMP itself works as an early sentiment gauge, a rough sense of how the market is reacting to an upcoming IPO before official subscription data is public. Experienced investors treat it as one input among several, never as a signal on its own.

Risks and Limitations

No legal recourse. These trades are not enforceable in court. If a buyer refuses to pay after allotment, or a seller backs out, there is no regulator to approach.
GMP does not predict listing price reliably. A high GMP does not guarantee a strong debut. Several IPOs with big premiums quoted in the grey market have still listed flat or below their issue price.
Fraud is a real possibility. Deals are informal and cash-based. A dealer can vanish after taking money or quote a rate that never gets honoured.
Tax can land on the wrong person, on paper. The shares stay in the original applicant’s name, so the tax department comes after them for capital gains, even if someone else pocketed the real profit.
Hype drives decisions it should not. A high GMP number on group chats pushes some beginners to apply for an IPO without reading the prospectus or checking the company’s financials.

Tips for Beginners

Treat GMP and Kostak numbers as one data point among many, never as the reason to apply.
Read the red herring prospectus and the company’s financials before applying, no matter what the grey market chatter says.
Skip this market entirely if you are not comfortable with a deal that has zero legal backing. Apply through your broker the regular way instead.
Never hand over your application details or money to a dealer you cannot verify.
Remember that any grey market gain or loss still needs to show up in your own tax filing if the shares are in your name. For a clearer picture, see this guide on income tax on your demat account.

Kostak Rate vs Subject to Sauda vs GMP

Parameter	GMP	Kostak Rate	Subject to Sauda
What gets traded	One share’s premium	The entire application	The entire application
Payout with no allotment	Deal usually falls apart	Full amount still paid	Deal cancelled, nothing paid
Payout with allotment	Issue price plus GMP, per share	Fixed Kostak amount only	Fixed amount, usually higher than Kostak
Who carries the risk	Shared between both sides	Buyer takes on the no allotment risk	Buyer takes on the no allotment risk, but only pays out if allotted
Typical use	Gauging listing sentiment	Locking in a guaranteed, smaller profit	Chasing a bigger, allotment-dependent payout

Common Mistakes to Avoid

Chasing an IPO purely because GMP looks high. This number reflects sentiment at one point in time, not whether the business is worth buying into.
Dealing with unverified dealers. Beginners sometimes accept an offer from someone found through a random forwarded message, with no way to check if that person will actually pay once results are out.
Assuming popularity equals safety. Just because thousands of people trade in this market every IPO season does not make it regulated. There is still no SEBI recourse if your deal collapses.
Forgetting the tax angle. Since the gain sits under the original applicant’s PAN, skipping it in your tax return can bring a notice later, even if you never kept that money.
Trying to game allotment odds through multiple demat accounts. Some beginners open several accounts in different names hoping to boost their chances. This is against the rules and carries its own risk, explained in this piece on applying for an IPO with multiple demat accounts.

Who Should Use This

This market suits experienced investors and dealers who understand IPO mechanics, are fine with informal cash deals, and can absorb a total loss if the other side does not pay up. It does not suit new investors or anyone hoping for a steady, repeatable source of income, since payouts depend entirely on trust, allotment results, and market mood.

If you are just starting out, the safer path is applying for IPOs the regular way through your broker, and understanding factors like what makes an IPO listing successful before worrying about grey market numbers at all.

Conclusion

Three tools drive the IPO grey market. GMP, Kostak rate, and Subject to Sauda each let someone profit from an IPO application before the stock lists, without necessarily holding the shares till then. None of it carries SEBI backing or legal protection. If a deal falls through, you are on your own. Understand these mechanics well enough that grey market noise never talks you into applying for the wrong IPO, and stay out of the trading itself unless you fully accept the counterparty risk that comes with it.