Subject to Sauda — What It Means

In the grey market vocabulary, you will encounter two primary transaction types: Kostak and Subject to Sauda. Chapter 4 covered Kostak. This chapter covers Subject to Sauda — what distinguishes it, how the transaction works, and when it is used.

Defining Subject to Sauda

"Sauda" is a Hindi word for "deal" or "transaction." "Subject to Sauda" literally means a deal that is conditional — specifically, conditional on receiving allotment.

Unlike Kostak — where the payment is fixed regardless of allotment — Subject to Sauda is a per-share premium paid only if allotment occurs.

Structure:

• If you receive allotment: the buyer pays you a premium per share (the Sauda rate) and takes your shares
• If you receive no allotment: no payment, no transaction — the deal is void

This is essentially a conditional forward contract. The premium is guaranteed only if the underlying condition (allotment) is met.

Kostak vs Subject to Sauda: The Key Comparison

How Subject to Sauda Works in Practice

Example:

• IPO issue price: ₹300
• Lot size: 200 shares
• Subject to Sauda rate: ₹50 per share

If allotment received (200 shares):

• Buyer pays: 200 × ₹50 = ₹10,000
• Buyer takes delivery of 200 shares worth ₹300 (issue price) per share
• Buyer's effective cost per share: ₹300 + ₹50 = ₹350
• Buyer profits if listing > ₹350

If no allotment:

• Zero payment, zero transaction
• Both parties move on

Why Sellers Prefer Subject to Sauda in Some Situations

Subject to Sauda pays more per share than Kostak — but only if allotment happens. For sellers who believe their allotment probability is reasonably high (say, a 30–40% chance in a moderately subscribed IPO), Subject to Sauda captures more upside.

Mental model:

• Kostak = selling your lottery ticket for a fixed price before the draw
• Subject to Sauda = agreeing that if you win the lottery, you share the prize with the buyer (but if you lose, you get nothing)

For sellers in heavily oversubscribed IPOs (5–10% allotment probability), Kostak provides certainty in an uncertain situation. For sellers in moderately subscribed IPOs (30–50% allotment probability), Subject to Sauda may offer more expected value.

The Sauda Rate vs GMP Relationship

Subject to Sauda rates and GMP are related but not identical.

In theory:

• GMP reflects expected listing price premium per share
• Sauda rate should be below GMP (the dealer still needs a profit margin)
• Sauda rate ≈ GMP × (discount for dealer margin and listing uncertainty)

In practice, when Sauda rates are close to or above GMP, it signals either:

• Dealers are very confident about the listing (narrowing their margin)
• Competition among dealers is intense (driving up prices for applications)
• GMP itself may be understated

When Sauda rates are significantly below GMP:

• Dealers are uncertain about allotment or listing
• There may be concerns about the company's fundamentals
• Consider this as a signal of internal grey market scepticism

When Is Subject to Sauda More Common?

Subject to Sauda is used most when:

Allotment probability is meaningful: If the IPO is subscribed 2–5x (decent odds of allotment), Sauda makes more sense than Kostak from a buyer perspective — paying only on delivery is more efficient.

The issue is less hyped: For blockbuster IPOs with 50x+ subscription, Kostak dominates — the allotment probability is so low that paying per application is the most practical structure. For less subscribed issues, Sauda is more common.

Near-listing: As the listing day approaches, Sauda transactions increase as uncertainty decreases and both parties have better information about the likely listing price.

Practical Guidance

For retail investors considering Sauda:

• Calculate expected value: probability of allotment × Sauda rate × lot size
• Compare to Kostak offer (if available) — which gives you more in expected value terms?
• Factor in the risk of receiving nothing (Sauda gives zero if no allotment)

Understand the counterparty: As with Kostak, Sauda transactions are based entirely on trust. The dealer's obligation to pay is informal. Know your counterparty before entering any grey market transaction.

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