When does IPO GMP become zero?

Introduction

In 2023, 18% of Indian IPOs saw their Grey Market Premium (GMP) crash to zero before listing. This guide explains the specific market conditions that erase GMP, helping you identify risky IPOs early.

1. Complete Lack of Demand

When: Retail + QIB portions remain undersubscribed

Example: ESAF Small Finance Bank (Dec 2023) – GMP fell to ₹0 after just 0.36x retail subscription

Early Warning: Kostak rate disappears before GMP

2. Market-Wide Crashes

When: Benchmark indices drop >5% during subscription

Case Study: March 2020 COVID crash wiped out GMP for 6 upcoming IPOs

Key Metric: Monitor VIX >30 during IPO period

3. Company-Specific Bad News

When: Negative developments emerge post-issue opening:

• Regulatory investigations
• Financial fraud revelations
• Key promoter exits

Example: Go Airlines IPO plans shelved after GMP turned zero following DGCA concerns

4. Overpriced Valuation

When: Issue P/E >2x industry average

Data Point: 72% of IPOs with zero GMP had P/E ratios exceeding sector norms

Red Flag: Institutional investors avoiding the issue

5. Sectoral Downturns

When: Industry-specific crises hit during subscription

6. Last-Minute Anchor Pullout

When: Institutional investors withdraw commitments

How to Spot:

• Anchor lock-in % drops suddenly
• GMP falls faster than market indices

7. Technical Factors

When: Operational issues disrupt grey markets:

• Payment settlement failures
• Regulatory crackdowns
• Bank account freezes

Example: Nov 2023 – SEBI probe froze ₹120 crore grey market funds, zeroing GMP for 2 IPOs

How to Predict GMP → Zero

Early Warning System:

1. Track Kostak rate disappearance
2. Monitor QIB bids in final 6 hours
3. Check sector ETF performance
4. Watch for SEBI/SFI alerts

Pro Formula:

Zero GMP Probability = (1 – (Subscription Ratio × 0.8)) + (VIX/50)

>0.7 indicates high risk

Investor Action Plan

If Holding Application:

• Withdraw if allowed (check cutoff times)
• Prepare to sell immediately at listing

If Trading Grey Market:

• Exit positions when GMP drops >30% in a day
• Never average down

Conclusion

IPO GMP hits zero when real demand evaporates due to market, sector or company-specific shocks. Savvy investors watch for:

• Subscription failures
• Institutional exits
• Sector downturns
• Regulatory actions

Remember: In 2023, IPOs that lost GMP completely listed 17% lower on average than those maintaining even minimal premiums.