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IPOs, SEBI's book-building rules and the unregulated grey market premium

By CAShorts DeskPublished Sources: The Indian Express (Explained); SEBI Board memoranda on book building (2022) and listing timelines (2023).

Why in news: On 21 October 2026, the Small Investors Welfare Association (SIREN) asked SEBI to act against IPO grey market trading or examine formalising it.

IPOs, SEBI's book-building rules and the unregulated grey market premium
Illustration (AI-generated)

An initial public offering (IPO) is a company's first sale of shares to the public, made in the primary market under SEBI's ICDR Regulations, 2018. Before listing, an unofficial grey market trades these shares at a premium, outside stock exchanges. On 21 October 2026, a small investors' association asked SEBI to act against that trade or examine formalising it.

Syllabus: GS3 · Indian Economy & Growth; Prelims · Economy & Social Development; GS2 · Statutory & Regulatory Bodies

Why this matters for UPSC

GS3 economy: capital markets and SEBI's regulation of public issues. Prelims can ask about book building, ASBA and quotas; Mains, how to regulate the grey market.

In short

An initial public offering (IPO) is a company's first share sale to the public, governed by SEBI's ICDR Regulations, 2018; an unregulated grey market now prices these shares before listing.

From price band to listingPrice bandannouncedBid money staysblockedAllotment of sharesListed shares trade

Book building, ASBA and quotas protect investors inside the system; SEBI must now state the grey market's legal status and curb premium-driven speculation.

Why it matters

A first-time investor who sees a high grey market premium on a messaging group may apply for an IPO expecting a quick gain on listing day. If the share opens below the issue price, that investor loses money, and the loss can be painful when the bid was paid for with a loan or savings. The grey market itself offers no protection: deals are oral, nothing is recorded, and no exchange guarantees settlement. Inside the official system, ASBA blocks the bid money and allocation rules reserve a share for small bidders. The larger issue is market integrity: unofficial prices that spread widely can be mistaken for real demand and can distort how a whole issue is priced and subscribed.

Prelims pointers

  • The primary market raises fresh capital through issues such as IPOs; the secondary market is where already-listed shares trade among investors on recognised stock exchanges.
  • In a fixed price issue, the issuer states the price upfront and retail individual investors get at least half of the issue.
  • A company making a book-built IPO on the profitability route needs net tangible assets of at least Rs 3 crore in each of the preceding three years, among other conditions.
  • SEBI's Board in 2015 made ASBA the sole payment route for public issues and cut listing time from T+12 to T+6 working days, from 1 January 2016.
  • In listing timelines such as T+3 and T+6, 'T' is the day the public issue closes, not the day it opens.
  • Grey market deals settle only the difference between the agreed price and the listing price; no shares are delivered or held by the buyer.

Practise a UPSC-style question

With reference to book building in public issues in India, consider the following statements:

1. The upper end of the price band cannot exceed 110% of the floor of the band.

2. The issuer must announce the price band at least two working days before the issue opens.

3. In the fixed price method, investors bid at any price within a band set by the merchant banker.

Which of the statements given above is/are correct?

  1. (a) 1 only
  2. (b) 2 only
  3. (c) 3 only
  4. (d) 1, 2 and 3
Show the answer

Answer: (b) 2 only

Answer: (b) 2 only. Only the two-working-day notice for the price band is right.

Statement 1: incorrect. Under SEBI's ICDR Regulations, 2018, the upper end may be at most 120% of the floor, not 110%.

Statement 2: correct. The issuer announces the price band at least two working days before the issue opens.

Statement 3: incorrect. Bidding within a band is book building; in the fixed price method the price is stated in advance.

Eliminate: statement 3 describes book building, not the fixed price method. Out: (c), (d).

Eliminate: statement 1 gives the wrong cap; the rule allows 120%. Out: (a).

Trap: Near-miss figure. A 110% cap sounds plausible, but the rule allows the upper end up to 120% of the floor.

Remember: Price band cap is 120% of the floor; announced two working days before opening.

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