How GMP is Formed

GMP is not calculated by a formula. It is not published by SEBI or any exchange. It emerges from the interaction of buyers and sellers in an informal market — the same way any price forms in any market.

Understanding the mechanics of GMP formation helps you read it more accurately — separating genuine demand signals from manufactured sentiment.

The Basic Supply-Demand Mechanism

At its core, GMP is set by the dealers who quote buy and sell prices for IPO shares (or application forms). These quotes are based on their read of:

• How many people want to buy IPO shares before listing (demand)
• How many applicants want to sell their allotment rights before listing (supply)

When demand exceeds supply — more people want to own the shares than want to sell — dealers raise their quotes. GMP goes up.

When supply exceeds demand — many applicants want to exit their positions before the risk of listing — dealers lower their quotes. GMP compresses or goes negative.

This is conceptually identical to how prices form in any market. The difference is the thinness of the market and the absence of a centralised, transparent exchange.

The Information Inputs That Drive Demand

1. Subscription Data

The most important driver of real-time GMP during an active IPO is the live subscription data published by BSE and NSE. As QIB, HNI, and retail subscription numbers update throughout the day, grey market dealers immediately adjust their quotes.

Strong QIB subscription → dealers raise GMP (institutional confidence signal) Weak QIB subscription → dealers compress GMP (institutional scepticism signal) HNI surge on Day 3 → GMP rises (hot money reading positive) Retail subscription slowing → GMP is stable or falls slightly (crowding slows)

2. Anchor Investor Quality

The day before an IPO opens, anchor investor allocations are disclosed publicly. When marquee institutional names — top mutual fund houses, large FIIs, domestic insurance companies — appear as anchors, grey market dealers interpret this as strong institutional conviction and raise GMP quotes accordingly.

When anchor investors are second-tier or unknown names, the GMP response is muted.

3. Market Conditions

The broad market environment profoundly affects GMP. In a bull market — Nifty at all-time highs, risk appetite elevated, money flowing into equities — GMPs are systematically higher across all IPOs. Every boat rises.

In a correction — Nifty falling, FII outflows, risk-off sentiment — GMPs compress or go negative even for fundamentally strong IPOs. Paytm's weak GMP in November 2021 partially reflected the market correction that was beginning around its listing.

This market-condition effect means you cannot compare GMP levels across different market cycles. A ₹30 GMP in a bear market is a stronger signal than a ₹60 GMP in a raging bull run.

4. Company and Sector Fundamentals

Grey market dealers are not fundamental analysts, but they respond to information that circulates in the investing community. When a well-known company or fund manager publicly comments positively on an IPO, GMP reflects this.

Sector sentiment matters too. During India's defence sector boom (2022–2024), defence-related SME and mainboard IPOs commanded GMP premiums structurally above sector-neutral companies. Railways, renewable energy, and new-age technology have each had their GMP-inflating moments.

5. DRHP Quality (Indirect)

Companies with clear growth stories, clean promoter backgrounds, and strong financial statements attract more investor interest — which flows into both higher subscription and higher GMP. Companies with complex structures, vague use of proceeds, or promoter questions tend to see muted GMP despite potential market momentum.

The Supply Side: Who Sells in the Grey Market?

Supply comes primarily from applicants who:

Want certainty over gambling: After applying and having capital blocked, some retail investors prefer a guaranteed small gain (kostak payment from dealer) over the uncertainty of listing. Particularly common among risk-averse first-time applicants.

Have applied in multiple family members' names: Households that applied across multiple PANs may sell some kostak rights to cover application costs or lock in gains on a portion while holding the rest.

Need liquidity: The IPO process blocks capital for 3–6 days. Occasionally, investors who applied realise they need that capital sooner and sell their application rights.

Professional grey market sellers: Some experienced market participants apply for IPOs specifically to sell in the grey market — essentially running a risk arbitrage strategy between the kostak rate and their view of listing performance.

The Operator Effect: Manufactured GMP

The grey market is manipulable. Because it is thin and informal, coordinated buying by a small group of operators can drive GMP to artificially high levels — creating the appearance of strong investor demand and generating FOMO-driven retail applications.

How operator manipulation works:

1. Operator accumulates IPO application forms (by buying kostak from retail applicants) at a modest premium
2. Operator simultaneously quotes high buy prices in the grey market, driving GMP up
3. High GMP is reported on financial websites and social media, driving retail FOMO
4. Subscription increases, generating more social proof
5. On listing day, the operator sells allotted shares into the opening demand that their own high GMP helped create

Not every high GMP is operator-driven. But in some SME IPOs — and occasionally in mainboard issues with limited institutional participation — this dynamic is real.

The countermeasure: Cross-reference GMP with QIB subscription data. Operators cannot inflate QIB subscription — those bids come from large, independent institutions. If GMP is very high but QIB subscription is modest, treat the GMP with significant scepticism.

How GMP Evolves During an IPO

Pre-IPO (before subscription opens): GMP is based on DRHP analysis, anchor investor quality, and sector sentiment. Often modest and uncertain at this stage.

Day 1 of subscription: GMP adjusts based on opening subscription data. Strong Day 1 retail interest drives GMP up.

Day 2: GMP is most dynamic. QIB subscription begins to build, providing the most credible signal. Watch for QIB-driven GMP adjustments.

Day 3 (closing day): GMP peaks or adjusts based on final subscription data. HNI rush on closing day often spikes both HNI subscription and GMP simultaneously.

Post-close to listing: GMP settles based on consensus expected listing price. Adjustments are driven by broader market movements and any new information that emerges.

---