A negative Grey Market Premium (GMP) indicates that the shares of an IPO are trading below the issue price in the grey market, signaling weak demand and potential listing losses. Here are three notable IPOs with negative GMP and whether investors should be concerned
1. Paytm (One97 Communications Ltd)
- IPO Details: Paytm’s IPO in November 2021 was one of India’s largest, but it faced a negative GMP before listing.
- Reason for Negative GMP: Concerns over high valuations, lack of profitability, and intense competition in the fintech sector.
- Listing Performance: The stock listed at a 27% discount to the issue price and continued to underperform.
– Should You Worry?
- Yes: Paytm’s negative GMP was a red flag, reflecting market skepticism about its valuation and business model. Investors who ignored the warning faced significant losses.
2. Policybazaar (PB Fintech Ltd)
- IPO Details: Policybazaar’s IPO in November 2021 also saw a negative GMP before listing.
- Reason for Negative GMP: Concerns over profitability, high valuations, and competition in the insurtech space.
- Listing Performance : The stock listed at a discount and struggled to recover in the initial months.
- Should You Worry?
- Moderate : While the negative GMP indicated short-term concerns, Policybazaar’s strong market position and growth potential could offer long-term value. Investors should assess their risk appetite.
3. LIC (Life Insurance Corporation of India)**
– IPO Details : LIC’s IPO in May 2022, one of India’s largest, faced a negative GMP due to market volatility and pricing concerns.
- Reason for Negative GMP : Market conditions, high issue size, and concerns over valuation compared to private insurers.
- Listing Performance : The stock listed at a discount but showed resilience over time due to LIC’s dominant market position.
- Should You Worry?
- No : LIC’s negative GMP was largely due to external factors like market volatility. Its strong fundamentals and market leadership make it a relatively safe long-term bet.-
Key Takeaways: Should You Worry About Negative GMP?
1. Understand the Reason: A negative GMP can stem from weak fundamentals, overvaluation, or external factors like market conditions. Analyze the cause before deciding.
2. Short-Term vs. Long-Term : Negative GMP often impacts short-term performance. If you’re a long-term investor, focus on the company’s fundamentals and growth potential.
3. Risk Appetite : If you’re risk-averse, a negative GMP is a warning sign. Avoid such IPOs or wait for post-listing performance before investing.
4.Market Sentiment : Negative GMP reflects market sentiment, which can change over time. Monitor the stock’s performance post-listing.
Conclusion
While a negative GMP is a cautionary signal, it doesn’t always mean the IPO is a bad investment. Evaluate the company’s fundamentals, industry position, and long-term prospects before making a decision. For high-risk IPOs like Paytm,
it’s better to be cautious, while for fundamentally strong companies like LIC, a negative GMP may present a buying opportunity.
Always consult a financial advisor for personalized guidance.