Exclusive: Who’s fuelling pre-IPO grey market activity? Is ‘grey area’ in regulations responsible?

Investors often track grey market premiums to guess an IPO's listing price, but here's the catch: the Securities and Exchange Board of India (SEBI) doesn't recognise or approve the grey market. This lack of regulation makes grey market activities highly discouraged due to insufficient disclosures and unclear promoter track records. Interestingly, SEBI-registered brokers and fintech platforms sometimes promote trading in unlisted stocks, often creating buzz around limited supply and no guarantee of IPO allotment. Many a time, they even label certain stocks as "most trending" or "most bought and transacted" to lure investors with promises of high returns.

Market experts believe there is no problem if two parties decide to trade with each other upon agreed consideration, but inducing investors is a big concern. “This is a disturbing trend because platforms are just promoting to buy any share, they are operating like an exchange but no transparency on how and who is deciding the price and premium," said a market analyst on the condition of anonymity. 

However, many brokers differ in this regard. “Trading of unlisted shares is outside the purview of SEBI. It comes under the Ministry of Corporate Affairs, so SEBI can’t restrain," said a broker on the condition of anonymity.

According to Arun Kejriwal, Founder, Kejriwal Research and Investment Services (KRIS): “It’s a grey area and SEBI has not specifically barred brokers from facilitating trade in such stocks."

He also described it as a "typical bull run boom moment phenomenon".

Who is fuelling the Grey Market premium? Is regulatory gap also responsible? Beware with fake apps promoting/inducing investors to put money in unlisted stocks. @SEBI_India https://t.co/to8iPcf2kH

— Brajesh Kumar Mishra (@BrajeshKMZee) October 21, 2024

"Unlisted stocks do not come into the regulatory domain of SEBI unless a public market is created out of it. SEBI cannot control private transactions although it can certainly come up with an advisory to brokers if they are creating a buzz about unlisted stocks and actively marketing them," said Anil Choudhary, Partner, Finsec Law Advisors. 

According to a former regulatory officer, companies and promoters need to be cautious and not use grey market premium tactics to pump the stock price. "If the number of shareholders exceeds 200, it may create a problem for IPO approval as it may be considered a deemed public issue and SEBI approval may get difficult," according to the person.

Zee Business learned from sources that the recent issues of Waaree Energies and Mobikwik were also delayed because of this deemed public issue technicality. In such instances, the regulator and merchant bankers exercise utmost diligence to ensure that no promoter-driven agenda is at play. If the issue gets stuck because of such technical reasons, investors may face uncertainty with their money getting blocked. 

Experts raise concern, and more so with new-age tech companies, as many times they are in losses when they file for IPOs and burn cash to retain their market share. For many of them, scaling and becoming profitable becomes difficult. Additionally, their business models are easy to replicate, so viability becomes an issue.      

Cyber Fraud

“Seeing huge interest from investors, fraudsters create fake apps for buying and selling of such unlisted/pre-IPO stocks, where investors certainly lose money," said market expert Rakesh Bansal. 

“There is no grievance redressal mechanism for such transactions as these are in unregulated space," Bansal added. 

In one case, a Delhi-based investor lost Rs 24 crore in a fake app which was promoting such pre-IPO issues, said another market expert.