Reliance Power IPO Clouds Grey Market

MUMBAI: Even as Reliance Power's initial public offer (IPO) awaits clearance from market regulator, SEBI, a dispute has broken out among traders in the grey market, where deals had been entered into even before the issue’s price band has been fixed.

Market watchers say the situation has arisen following the company’s decision to float the shares at a face value of Rs 10 instead of Rs 2 as announced earlier.

A section of grey market operators, which had short sold Reliance Power shares in the grey market, and are staring at potentially huge losses, is using this development as a pretext to renege on their commitments. Technically, if there is a change in the face value of a share, the premium or discount will change to reflect the new face value.

Transactions in the grey market are done purely on the basis of trust and there are no documents because the activity — though widely prevalent — is outlawed in the first place.

Grey market players said some brokers in Mumbai and Ahmedabad, who initially threatened to backtrack from their commitments, have now agreed to stand by their trades. However a large number of brokers in Jaipur, who owe allegiance to a Mumbai-based operator, are said to have refused to honour their commitments.

The operator in question is said to have run up a loss of over Rs 50 crore. All these players are believed to have been selling Reliance Power shares short when they were trading at a premium of Rs 30-35 per share a couple of months back.

While the issue has been delayed, the premium in the grey market has been steadily on the rise. As a result these players have run up significant losses.

Interestingly, Reliance Power is the first instance of an IPO being traded in the grey market even before the price band has been fixed. Premium or discount in the grey market is linked to the price band. But in the case of Reliance Power, it was the purely the premium that was being traded.

“This (grey) market operates purely on faith and if that is broken, people will be wary of entering into deals,” said a broker who arranges transactions in the grey market. The deals are entered into verbally, and the shares change hands on the trading screen once they are listed.

Grey market is a thriving racket in many small towns of the country, where applicants “rent out” their permanent account numbers (PAN) and demat accounts for a fee. These applicants subscribe to IPOs, but have already handed over signed delivery instruction slips to the brokers with whom they have struck the deal. Once the shares are allotted, the broker transfers those shares into his own account.