What is Kostak in Grey market?

Kostak (or price of application) is the premium amount in rupees at which IPO applications are being traded in IPO Grey Market. Usually ‘Kostak' value is defined as the premium of a maximum lot retail application in an IPO.

Kostak price is important mostly before issue is close for subscription and final bidding status is available to the IPO investors. Very few IPOs applications are traded after final bidding status is available to the investors.

‘Kostak' is especially for people who do not want to take risk with IPO allotment or listing gains.

Example:
BGR Energy Limited
Issue Price: Rs 480 Per Equity Share (at upper band)
Lot Size: 14
Grey Market Premium: Rs 350 to Rs 360
Kostak (Rs 100000): Rs 2500 to Rs 2600

This means BGR applications of Rs 1 lakhs are being traded in IPO Grey Market at Rs 2500 to Rs 2600.

Even though the Grey Market Premium of this IPO is around 75% of the issue price, the ‘Kostak' is just 5% of the application amount. This is because Grey Market traders are assuming that the issue will highly oversubscribe and there will not be firm allotment even for retail investors who will apply full Rs 1 lakhs. They are assuming one out of two people will get allotment and thus Rs 2 lakh investment will give them approximate Rs 5000 return. This way they are ready to buy 1 lakh application for Rs 2500.