How Demand & Supply Drive IPO GMP: The Complete Mechanism
Introduction
IPO GMP (Grey Market Premium) acts as a real-time demand-supply gauge, but most investors misinterpret its signals. In 2023, IPOs where GMP correctly reflected demand-supply imbalances delivered 2.3x better returns than others. This guide reveals how to read GMP like a market maker.
1. The Basic Economics of GMP
| Scenario | GMP Impact | Example |
|---|---|---|
| High Demand + Limited Supply | GMP Soars | Tata Tech (GMP â‚ą420) |
| Low Demand + Excess Supply | GMP Turns Negative | Paytm (-â‚ą150) |
| Balanced Demand-Supply | GMP Matches Listing | IRFC (GMP ₹2 → Listed ₹2.1) |
2. Key Demand Indicators
Bullish Signals:
- QIB Oversubscription >50x (Strong institutional demand)
- Kostak Rate >GMP (Traders betting on allotment)
- Retail HNI Borrowing (Leveraged demand)
- Sector Momentum (e.g., Renewable energy IPOs in 2023)
Real Case: IREDA saw GMP jump from â‚ą5 to â‚ą15 after 100x QIB subscription
3. Key Supply Indicators
Bearish Signals:
- Low Anchor Lock-in (<50% indicates weak institutional support)
- High OFS Component (Existing shareholders dumping shares)
- Retail Quota Unsold (Poor public participation)
- Pre-IPO Drops (Unlisted market prices falling)
Warning Sign: LIC IPO had 35% anchor lock-in → GMP crashed pre-listing
4. The Liquidity Factor
How It Distorts GMP:
- Grey Market Volume <0.1% of actual IPO size
- 1 Large Trade can swing GMP by 20%+
- Bid-Ask Spread >5% indicates artificial demand
Pro Tip: Check if GMP moves with actual trades or just dealer quotes
5. Demand-Supply Timeline Analysis
| IPO Phase | Demand Source | Supply Pressure |
|---|---|---|
| Pre-Anchor | Dealer speculation | Rumor-driven |
| Anchor Booking | Institutional commitments | Lock-in expiry dates |
| Public Subscription | Retail/HNI applications | OFS portions |
| Listing Day | FOMO buying | Profit booking |
6. How to Calculate Real Demand?
GMP-Adjusted Demand Formula:
Effective Demand = (GMP Ă— Grey Market Volume) / (Issue Size Ă— 0.1)
Example Calculation:
- GMP: â‚ą100
- Grey Market Volume: 10,000 shares
- Issue Size: 10 crore shares
- Effective Demand = (100Ă—10,000)/(10,00,00,000Ă—0.1) = 1%
Interpretation: <1% suggests weak real demand despite high GMP
7. Market Maker Manipulation
How Supply Artificially Tightens:
- Dealers hoard application forms
- Create artificial scarcity
- Inflate GMP to attract retail investors
- Dump positions at listing
Red Flag: GMP rising despite poor subscription numbers
Practical Application: 2024 Case Study
Jyoti CNC IPO (Jan 2024):
- Initial GMP: â‚ą90 (Strong demand)
- Key Signal: Kostak rate at â‚ą120 (higher than GMP)
- Reality Check: Retail portion undersubscribed
- Outcome: Listed at â‚ą360 (GMP was â‚ą90, issue price â‚ą270)
Lesson: Kostak > GMP indicated real demand despite retail numbers
Investor Action Plan
When GMP Shows True Demand:
- GMP rising with subscription numbers → Strong buy
- Kostak > GMP → Allotment demand is real
- Institutional bids > Retail bids → Sustainable demand
When GMP Lies:
- GMP up but subscriptions flat → Manipulation likely
- High GMP + High OFS → Supply overhang coming
- GMP volatile → No real demand consensus
Conclusion
Understanding IPO GMP through demand-supply lenses separates successful investors from the herd. Remember these key takeaways:
- GMP reflects grey market liquidity, not overall demand
- Cross-verify with Kostak rates and subscription data
- Track institutional activity for sustainable demand
- Beware of artificial supply crunches created by dealers
Final Tip: The most accurate demand signals come from QIB subscription trends in the final 4 hours – this moves GMP more reliably than any other factor.
