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Mumbai: The grey market is flat. Where once high net-worth individuals queued up to fork out a premium to buy shares in firms ahead of their listing, there is little interest.

The muted performance of the primary market, along with volatility in the secondary markets starting August, is the principal reason.

When the primary market picks up, there is a buzz in the grey market. High net-worth individuals (HNIs) are willing to pay a premium to buy shares in firms that are yet to list. The idea is to cash in on the strong gains seen on the day of listing.

The volatility in the secondary markets has limited the upside for new listings on the day they debut on the bourses. According to Prime Database, 15 firms have raised 6,348 crore through initial public offerings (IPOs) but very few of them have shown spectacular gains on listing. The strongest gains were seen in the case of VRL Logistics Ltd, which jumped 43.1% on the first day of trade. In fact, only half of these stocks ended the first day with gains.

The 30-share BSE Sensex has erased 6.14% since 11 August, when China devalued the yuan.

The recently concluded IPOs such as Prabhat Dairy Ltd and Sadbhav Infrastructure Project Ltd saw premiums vanishing due to limited interest from investors.

“The grey market is dependent on interest levels in IPOs. Currently, since IPOs have been seeing lacklustre response on listing due to the weak sentiment in secondary markets, we haven’t heard much about strong grey market premiums of late," said market analyst Ambareesh Baliga.

The lacklustre grey market is in contrast with what was seen in 2007-08, one of the most active periods for primary offerings.

“Compared to 2007-08, the sentiment is dull at this point," a Mumbai-based trader said. He declined to be identified.

During 2007-08, a number of IPOs saw bumper listings. Companies such as Burnpur Cement Ltd, Everonn Education Ltd and Allied Computers International (Asia) Ltd saw listing-day gains of 286.3%, 241.8% and 214.2%, respectively.

Other hot issues were Icra Ltd and Adani Ports and Special Economic Zone Ltd, which returned more than 100% on debut.

However, so far this year, none of the issues managed to post even 50% listing gains. The highest debut gains were posted by VRL Logistics, which posted gains of 43.1% on day one.

“For Navkar Corp., IPO premium went up to 44, but then towards the end HNI commitments didn’t come in as expected, so it fell to as low as a discount of 7, as there was a commitment of a mere 0.89 times," said the trader quoted above.

“Prabhat Dairy too started with a premium of 21, but later market conditions deteriorated, and they had to cut down their price band. Towards the end of the issue, there were deals that happened at 5 discount," the trader added.

Prabhat Dairy was forced to extend its IPO by three days and cut the price range for the shares offered as volatility in the secondary markets hit demand. The firm also cut the price band of the issue from 140-147 earlier to 115-126. The firm has managed to raise 360 crore at the lower end of the price band.

The grey market is driven by HNIs who put in bids to subscribe to large chunks of an IPO, far in excess of the portion reserved for such investors. This pushes the overall subscription levels for the issue and, in turn, lures investors to buy shares in the grey market at a premium.

“The general agenda behind a grey market is to create a hype around the issue, to attract retail and HNI investors. It is generally done by operators or promoters, either in a group or individually. They usually pay a retail investor a premium over the issue price, and this investor, in turn, commits the proceeds of the shares to them post allotment," said Prithvi Haldea, founder chairman, Prime Database, a primary market tracker.

“The general idea is to back out after garnering the listing gains," Haldea said.

He pointed that since the recent market sentiment has been soured by the turmoil in secondary markets, there is not much activity in the grey market.

“There was no premium calling for recent issues, as they got lacklustre response. They weren’t attractive enough and didn’t get huge demand interest from HNIs," said Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd.

Kejriwal pointed that the grey market is a function of IPO market.

“For IPO market to take off, valuations have to be realistic. So, if the upcoming IPOs leave enough on the table and the secondary market puts up a decent show, the primary market can revive," Kejriwal said.

“We need one blockbuster issue to change the sentiment. The last blockbuster issue we saw was Syngene. I think IndiGo may not be able to command a premium, as the aviation industry does not have investor attraction," added Kejriwal.

InterGlobe Aviation Ltd, the owner of India’s biggest and most profitable airline IndiGo, is likely to hit the capital market with its 2,500 crore IPO in October.

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