Grey market trading lessons for retail investors from HDB Financial IPO

Before the announcement, HDB Financial’s unlisted shares were trading at ₹1,250 apiece. 

As a result, the price of HDB Financial’s shares has corrected sharply in the grey market. To compound matters, regulations require a six-month lock-in post-IPO. 

Here are the risks that investors should consider before dabbling in the unlisted markets.

Fraud risk

Acquiring unlisted shares always involves the risk of fraud, as such transactions aren’t facilitated by any regulated platform like an exchange. 

“Investors can even lose their capital if they get caught in a fraudulent scheme,” said Deepak Jasani, an independent market expert. 

Besides, brokers charge higher commissions in the unlisted market.

Grey market risk

Grey market activity typically begins in anticipation of the company’s public listing. Early activity may start as soon as the draft red herring prospectus (DRHP) is filed, but it typically picks up pace once there is more clarity on the IPO launch.

However, the grey market comes with its own risks. “The grey market doesn’t facilitate efficient price discovery. The public float is typically limited in the grey market, as these shares are held closely by a limited number of people. As a result, the grey market prices can quickly shoot up or down, and liquidity can suddenly dry up or rise,” explained Jasani.

When the buying interest for the limited pool of unlisted shares is high, the grey market price may end up being much higher than the company’s fair valuations. In HDB Financial’s case, the company assessed the value of its own shares at a much lower price than what the grey market was pricing them at.

Timing risk

The timing risk usually shows up in two ways.

The valuations in the grey market may be much higher as the buzz around the company’s IPO grows. However, these valuations may not necessarily be closer to the eventual IPO price.

“However, investors who may have bought the unlisted shares much before there is any indication of the IPO or when the company is still in the building phase, they are more likely to get these shares at a discount to the eventual IPO price and thereby are better positioned to make profits,” said G. Chokkalingam, founder and MD of Equinomics Research.

“This strategy also has risks, as one is investing in the company at a very early stage of business when there is no clarity on the future growth of the business or the potential of an IPO,” he added.

There is also a risk that the company may never go for the IPO. “It is not uncommon for companies to delay or even scrap their future IPO plans. There could be multiple reasons, including the company’s profitability, external issues such as competition, business environment or even regulatory changes,” said Jasani. 

This would essentially leave investors stuck with such shares without any potential exit.