Introduction

While IPO GMP (Grey Market Premium) is widely tracked by investors, few understand its inherent risks. In 2023 alone, 38% of IPOs with positive GMP listed below issue price. This guide reveals the hidden dangers of GMP reliance that every investor must know before making IPO decisions.

1. Market Manipulation Risk

How It Happens:

• Dealers artificially inflate GMP to attract retail investors
• “Pump-and-dump” schemes where insiders sell at listing
• Fake WhatsApp/SMS rumors about “sure-shot” GMP gains

Real Example: A 2022 SME IPO showed ₹120 GMP but listed at 15% discount after manipulation was exposed

2. Last-Minute Volatility

Key Dangers:

• GMP can crash 50%+ in final 48 hours (as with Paytm IPO)
• Market sentiment shifts (geopolitical events, sector crashes)
• Institutional investors changing stance last-minute

Data Point: 67% of GMP fluctuations occur in the last 3 trading days

3. Liquidity Illusion

Hidden Reality:

• Grey market trades are small in volume (typically 500-5000 shares)
• Large institutional orders move actual listing price differently
• GMP becomes irrelevant when real market liquidity kicks in

4. Regulatory Risk

Potential Threats:

• SEBI increasing scrutiny on grey market activities
• Brokers refusing to honor grey market contracts
• No legal recourse for failed grey market deals

Current Status: Grey market operates in regulatory grey area (neither legal nor illegal)

5. Information Asymmetry

Investor Disadvantages:

• Insiders know real demand before retail investors
• GMP sources often copy each other’s unverified data
• No standardized reporting methodology exists

6. Overvaluation Trap

How It Misleads:

• High GMP creates FOMO (fear of missing out)
• Investors ignore poor fundamentals due to GMP hype
• Example: LIC IPO had ₹90 GMP but listed at 8% discount

7. No Fundamental Correlation

Proven Findings:

• 2023 Study: Only 0.32 correlation between GMP and 1-year returns
• GMP reflects short-term sentiment, not business quality
• Many loss-making companies command high GMP

How to Mitigate GMP Risks?

Smart Strategies:

1. Triangulate data – Check GMP against QIB subscription and fundamentals
2. Track trends – Rising/falling GMP matters more than absolute value
3. Set stop-losses – For listing day trading based on GMP expectations
4. Verify sources – Use only trusted GMP providers (see our verified list)
5. Limit exposure – Never allocate more than 15% portfolio to GMP-based bets

Case Study: Paytm IPO (2021)

GMP Timeline:

• Day 1: ₹175 premium (bullish sentiment)
• Day 3: ₹90 (early warning signs)
• Listing Eve: Negative GMP (panic selling)
• Listing Day: 9% discount to issue price

Key Lesson: GMP collapsed despite heavy subscriptions when valuation concerns emerged

Conclusion

While IPO GMP provides useful sentiment data, it carries significant risks from manipulation to volatility. Successful investors use GMP as one of several tools rather than primary decision factor. Remember: In 2023-24, 42% of IPOs with ₹100+ GMP underperformed on listing day.

Final Advice: Always cross-verify GMP with institutional investor activity and fundamental valuation before investing.