Kostak vs Subject-to-Sauda vs GMP: Advanced Grey Market Trading Mechanics & Default Risks
Beyond simple GMP lies the structured world of Kostak rates and Subject-to-Sauda agreements. How grey market dealers hedge IPO risk, lock in profits before allotment, and why retail investors get trapped in default disputes.
Published on · Verified Analysis
Editorial Key Takeaways
This analysis is based on official Draft Red Herring Prospectus (DRED) filings, historical peer valuation multiples, and exchange data. Figures are audited for institutional accuracy.
In This Article
While most retail investors only look at the headline Grey Market Premium (GMP) figure, professional market participants and high-net-worth individuals frequently trade through two alternative off-market contracts: Kostak and Subject-to-Sauda.
Understanding how these contracts operate allows investors to understand the true underlying institutional sentiment behind heavily subscribed IPOs.
1. The Three Grey Market Quotations Compared
| Parameter | GMP (Grey Market Premium) | Kostak Rate | Subject to Sauda |
|---|---|---|---|
| **What is Traded?** | Individual allotted shares | The entire application ticket | The allotted application |
| **Payment Condition** | Settled on listing day against actual price | Paid upfront whether allotted or not | Paid only if allotment is won |
| **Risk Profile for Seller** | Holds allotment lottery risk and listing day price volatility | Zero risk; profit is 100% locked before allotment | Holds lottery risk; locks in listing gain |
| **Typical Target User** | HNI traders & speculators | Retail applicants wanting guaranteed cash | Retail applicants in heavy oversubscription |
2. How Kostak Works: The Math of Application Arbitrage
Suppose an IPO with an issue price of ₹500 and a lot size of 30 shares (₹15,000 application) has a ₹600 Kostak quote.
1. You submit an application via your bank ASBA.
2. You sell your application slip to a trusted grey market dealer for ₹600 cash upfront.
3. Scenario A (No Allotment): You keep the ₹600 Kostak profit. Your ₹15,000 ASBA block is released back to your bank.
4. Scenario B (Allotted 1 Lot): On listing day, your dealer instructs you to sell the 30 shares at market open and transfer the net proceeds to the dealer (minus issue cost). You keep the original ₹600 Kostak.
Why Dealers Buy Kostak: Dealers buy hundreds of retail applications to accumulate large blocks of shares in oversubscribed issues where individual allotment odds are low.
3. How Subject-to-Sauda Operates
In a Subject-to-Sauda trade, the dealer agrees to pay a much higher fixed amount — say ₹6,500 per allotted application — but only if you win the allotment lottery.
4. The Critical Counterparty Default Risk
Because grey market trades are unregulated cash settlements:
1. If a stock crashes below issue price on listing day, dishonest buyers frequently default on their Kostak/Sauda payout obligations.
2. If a stock doubles (100%+ pop), dishonest sellers sometimes refuse to deliver the shares to the dealer, causing legal stalemates.
3. SEBI Stance: SEBI and stock exchanges offer zero grievance redressal for grey market contract disputes.
5. Summary Rules for Retail Investors
Use Kostak and Subject-to-Sauda quotes as pure sentiment indicators:
*Disclaimer: Educational analysis only. IPOSathi does not engage in or encourage grey market transactions.*
About IPOSathi Research
Primary Market Analyst & Senior Financial Journalist · IPO Latest Updates Daily
Our research desk specializes in reading SEBI Red Herring Prospectuses, institutional anchor allocations, and forensic balance sheet audits. Every report follows rigorous E-E-A-T research standards without promoter sponsorship.