Introduction:
When an initial public offering (IPO) captures headline news for its high grey market premium (GMP), the attention typically falls on the assumed “listing gain”. Yet GMP is not merely speculation it often reflects investor confidence in the issuer’s disclosure quality. This article examines how the disclosure regime under the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) shapes the offer price and pre-listing sentiment.
Offer Price: Regulatory Framework and Disclosure Anchors:
The ICDR Regulations set out several mandatory disclosure requirements in an issuer’s draft/red herring prospectus (DRHP/RHP). Among the core requirements are: presentation of financial ratios (EPS, NAV, RoNW), peer-company comparisons, and a clear “basis of issue price” narrative under Schedule VI of ICDR Regulations. These disclosures make the offer price more than a market benchmark. They serve as the analytical foundation for evaluating pricing credibility. Further, lock-in rules for promoter and other shareholders (as described in ICDR Regulations) contribute to perceived alignment of interest, a key factor guiding sentiment.
What the Grey Market Responds To:
Although unregulated, the grey market activity in the run-up to listing tends to reflect investor perception of risk and value, anchored in disclosures. Key aspects that market participants assess include:
- The solidity of valuation justification in the offer document; (on the other hand The strength and credibility of the valuation reasoning disclosed in the DRHP/RHP under Schedule VI of the ICDR Regulations.)
- Promoter holding and post-offer lock-in duration;
- Clarity of “objects of issue” (the use of proceeds);
- Depth of risk-factor disclosures (for example, transactional, regulatory, customer-concentration Risks. Where disclosure is rigorous and transparent, GMP often remains stable or positive. Where disclosures are superficial or appear boiler-plate, sentiment may begins to falter well before listing.
Key Disclosure Levers Under ICDR That Impact Sentiment:
| Disclosure Requirement | Regulatory Basis | Relevance to Investor Sentiment |
| Basis of Issue Price (ratios, peer comparison) | Schedule VI of ICDR Regulations | Provides investors with logical validation of pricing rather than a speculative premium. |
| Promoter & Non-Promoter Lock-in | ICDR and related amendments | Longer lock-in signals higher promoter commitment, enhancing trust. |
| Use of Proceeds (“Objects of Issue”) | Chapter II & Schedule disclosures under ICDR | Specific project linkages (e.g., capacity, R&D, branch expansion) lend credibility; vague references (e.g., “general corporate purpose”) weaken them. |
| Risk Factor Disclosure | Offer document risk section, as required under ICDR | Well-tailored risks indicate transparency; generic wordings raise alarms. |
| Key Performance Indicator (KPI) Standards | SEBI Circular Feb 28, 2025 Industry Standards on KPIs | Uniform KPI disclosures aid comparability and give investors a stronger basis for value judgment. |
Recent Regulatory Development: KPI Standardisation (April 1, 2025 onwards)
In a landmark move on February 28, 2025, SEBI issued a circular (SEBI/HO/CFD/CFD-PoD-2/P/CIR/2025/28) setting out Industry Standards for disclosure of Key Performance Indicators in DRHPs and RHPs These standards apply to all filings on or after April 1, 2025, and require issuer companies and merchant bankers to adopt a uniform approach in identifying, defining and certifying KPIs. This development enhances comparability across issuers and places further onus on disclosure discipline.
Practical Insight: Linking Disclosure Quality to GMP Behaviour:
The disclosure chain functions as follows:
Disclosure Transparency → Valuation Credibility → Market Sentiment → GMP Movement
When disclosures are detailed and logically coherent, analysts and anchor investors respond positively, subscription momentum builds, and the grey market reflects this through a healthy or upward GMP. Conversely, weak narrative, unexplained high multiples, or vague use-of-proceeds tend to produce early GMP erosion, regardless of strong past financials.
Implications for Practitioners:
- Ensure that the “Basis of Issue Price” section does not merely list numbers but explains deviations versus peer benchmarks (growth rate, margin structure, leverage, competitive position).
- Link “Objects of the Issue” to measurable business metrics (e.g., MW of capacity, number of new branches, Annual Recurring Revenue).
- Highlight promoter continuity and lock-in narratives clearly in the offer document.
- Apply the new KPI Standards proactively, even for filings immediately after April 1, 2025 to reduce risk of SEBI query and boost investor confidence.
- Remember that disclosure quality now affects not just compliance but brand-impact and investor trust in the IPO.
Conclusion:
While GMP continues to be widely referenced by market participants, its significance lies not in its magnitude alone but in what it signals; the market’s endorsement of the disclosure narrative. For IPO-bound companies and their advisors, the real “premium” lies in building credibility through disciplined disclosures under the ICDR framework. In effect, transparency is the foundational driver of pre-listing sentiment. As the regulatory regime tightens (especially with KPI standardisation), practitioners must treat disclosure design not as a formality, but as a strategic instrument influencing valuation and investor psychology.