What is Kostak Rates in IPO Grey Market?

In IPO Grey Market, the Kostak Rate is the amount paid for an IPO Application before the IPO shares get listed in the stock market.

For example, XYZ Company came up with an IPO. The issue price is set at Rs 100 per share. The issue is expected to get listed in next 15 days.

There are people who don’t want to wait for those 15 days to trade in XYZ Company’s shares. They started buying and selling the shares unofficially with the people they know. These truncations create a grey market for IPO Shares before listing.

One of the ways people sell their shares in grey market is by selling the complete IPO Application to the buyer. For example, an investor applied shares of Rs 2,00,000 in XYZ Company’s IPO. He is not sure how many shares he will get allocated and what listing gains he may get.

On another side, there is a buyer who says I am ready to take the risk. Sell me your Rs 2L IPO application at Rs 5000. If the seller agrees, he could make the deal and get Rs 5000 and exit from this transaction. This Rs 5000 is the Kostak.
In almost all cases, the buyer asks the seller to sell the shares on the listing day and settle the difference.

Note that tax liability remains with the application seller. This could eat up your profits if the difference is very high. Suppose you are a seller. If the profit made on the listing day is Rs 30,000, you will have to pay Rs 25,000 (Rs 30,000 – Rs 5000) to the buyer. You are liable to pay taxes on Rs 30,000 which at the rate of 20% could be Rs 6000. This could result into net loss of Rs 1000 in this transaction.