SEBI Chairperson Madhabi Puri Buch made headlines on 21^st January 2025 when she announced that a specific platform for trading IPO-bound securities is in active consideration. The establishment of such a trading platform is cautiously seen as the biggest intervention to curb the rampant grey market activities that thrive in regulatory blind spots so far. Today, numerous pre-listing trade practices that are unregulated and done in cash regimes occur under the radar, leaving ample ground for manipulative practices by operators who end up victimizing investors and causing price distortions even before the securities are officially listed. The proposed “when listed” platform should bring transparency, formal scrutiny, and responsibility into such trades. Interestingly, India lacks a specific law that would govern grey market IPO dealings. Neither the SEBI Act, nor the SCRA, nor any other securities law sets out a specific definition or regulations for “grey market.” The absence of any regulatory mechanism has enabled the flourishing of an unofficial parallel market.

Key Words: Stock Exchanges, Securities Regulation, SEBI, Capital Market, Financial Regulations

Understanding Grey Market IPO Trading in India
The grey market is an unofficial over-the-counter (OTC) market whereby the IPO shares are sold and purchased prior to their introduction in the official stock exchange. When a company launches an IPO, trading in the grey market begins. The IPO has a set price band, but in the grey market, brokers quote an additional premium, following the grey market premium (GMP) or demand trends. On the listing day, if the stock opens above the grey market price, the broker will settle the difference in favour of the investor. However, if the stock falls below the purchase price, the investor incurs a loss.

The trading of grey market IPO is very risky as it is of an unregulated and informal kind. The investments are based on trust agreements, which puts the investors at risk of counterparties. The Grey Market Premium (GMP) tends to be overstated, thereby deceiving the investors into overvaluing the shares, which will plummet on listing, creating a huge loss to the retail investors. For instance, Virtual Galaxy Infotech, listed on NSE SME, had a GMP of 77.46% (₹110), but on the day of listing, it opened with a gain of just 26.76%, resulting in a significant loss for the investors. SEBI has voted against the grey market because of the irregularity, volatility, and suspicious transactions of the market. This regulatory reaction was further amenable as, on an occasion, the chairperson of SEBI revealed that it is thinking of a new platform, which will enable investors to trade the public issue even before the official listing. The suggested mechanism will enable investors to trade shares between the allotment of shares in the demat account and their formal listing on the exchange. The rationale for this move is to protect the investors and prevent the trading of the Grey Market, however, it is not a direct violation of the law and falls beyond the jurisdiction of the law of the SEBI. Nevertheless, in one of the recent Rajya Sabha sittings on 11 March 2025, it was made clear that no giving of investor protection in the grey market is even being thought of, which raises a grave doubt in the protection of investors.

A Legal and Regulatory Blind Spot
The trading of IPOs in the grey market is typically a one-on-one deal between two individuals, which takes place outside the recognised stock exchange during the pre-listing days. These trades entail speculative trading in unlisted securities by informal (broker and buyer) over-the-counter deals, creating a regulatory loophole that poses crucial questions about their legal enforceability and compliance with existing securities laws.

The main source of power and authority of the primary securities market control in India is the SEBI Act, 1992, which is the basis of the power and authority of the Securities and Exchange Board of India. Nonetheless, the IPO trading in the grey market is in a regulatory vacuum due to various gaps in regulations such as section 11(2)(a), which grants SEBI the power to regulate “the business in stock exchanges and any other securities market”, wherein the “securities market” under SEBI refers to the regulated, organised market but grey market being OTC fails to qualify as aforementioned in this framework. Besides that, SEBI section 12(1) stipulates that all intermediaries in the securities business should be registered by the Board; ironically, the transactions of the grey market are bilateral settlements between persons without any interference of SEBI, and thus they are not within the scope of the Board’s activity. Thus, SEBI cannot control the grey market IPO trades, and hence, a grey area in the system has emerged. . In this regard, therefore, this is what has been illuminated in the previous past by SEBI, which clarified that trading in listed or to-be-listed securities can only be conducted through recognised stock exchanges. It has also cautioned the investors in its beginner guide against engaging in the grey market dealings that are not listed on the official stock exchange.

Securities Contracts (Regulation) Act, 1956 (SCRA) is the legislation that regulates recognised stock exchanges. In this regard, Section 2(f) identifies the recognised stock exchange, and Sections 3, 9, and 10 define the legal framework to regulate the recognised stock exchange. Moving on. Section 19(1) literally prohibits any individual from joining a non-recognised stock exchange to trade in securities unless the government expressly grants him permission. Therefore, IPO trading under the grey market clearly does not fall under the scope of the above because such trades are not formed through the recognised exchanges and they are not governed by the provisions of the SCRA, nor are they subject to its regulatory jurisdiction. This inapplicability of the SCRA to the unofficial trading spheres has left a regulatory vacuum.

The Indian Contract Act of 1872 regulates the IPO grey market transactions, which are based on the uncertain events in the future, such as share allotment and listing price. Legally, these arrangements are problematic since parties may not have the actual intention of delivery of shares, but they are gambling on possible gains of the shares at listing. Such transactions fall under Section 30 of the Indian Contract Act, which addresses wagering contracts. When agreements depend entirely on uncertain future events with parties merely speculating rather than engaging in legitimate commerce, they become void. The landmark case of Dayabhai Tribhovandas v. Lakhmichand Panachand  (Bombay HC, 1885) established that contracts “by way of gaming or wagering are null and void,” prohibiting legal recovery of money paid under such arrangements. IPO grey market transactions exhibit classic wagering characteristics since they hinge on uncertain future events, allocation results, and price movements. This classification renders them void and unenforceable in courts. Even transactions involving actual share delivery face scrutiny under Sections 31-32 of the Indian Contract Act as contingent contracts. These agreements remain entirely dependent on the uncertain future event of share allotment under the IPO, placing their legal enforceability in question. The speculative nature of these transactions, whether involving delivery or not, consistently challenges their validity under Indian contract law. As in the Percept Finserve v. Edelweiss (2023) have clarified the distinction between prohibited forward contracts and permissible contingent contracts has been clarified, establishing that while binding future sale obligations are illegal under securities law, genuine options with contingent performance may survive legal scrutiny. However, most grey market IPO deals function as mutual bets on allotment outcomes without commitment to actual delivery, placing them squarely within the prohibited category of wagering contracts.

Most grey market IPO transactions, however, involve allotment bets without obligation to actual delivery, which puts them squarely in the banned category of wagering contracts. Legal analysis indicates that IPO grey market trading is in an all-encompassing regulatory vacuum, which is not within the geographical jurisdictional prerogative of SEBI, SCRA, and cannot be enforced through the Indian Contract Act. These deals are mostly unregulated, as they are informal, deal with unlisted securities, and they are not traded on a recognized exchange, yet are at the same time potentially void as wagering contracts under judicial precedents.

How SEBI’s New IPO Platform Can Transform Trading
The new when-listed platform will allow trading of IPO shares regulated between allotment (T+1) and formal listing (T+3). This system allows the retail investors to purchase or sell the number of shares assigned to them, prior to the listing. This platform will aid in finding the right price and eliminating informal cash-based dealings in the grey market and be operated by the official authorities. The transactions are to be cleared and settled by using the official depositories, which will ensure safe transactions. Similar to how the platform works like “when-issued” market for U.S. Treasury securities, where bonds are traded between the time they are announced and the time they are released, with government oversight. In both, forward trading in both systems occurs in an organized manner, which contributes to the determination of pricing and the elimination of informal transactions. The when-issued market provided by the U.S. Treasury is familiar and contains a substantial amount of money. This is unlike in the grey market, where the trades are not safe and can be modified at the convenience of the broker. Analysts such as the ones of the ICICI Direct note that improved liquidity allows investors to alter their stance prior to the listing thereby rendering the market less volatile. Although, the platform is under development, there are positive indicators that it will be capable of stopping the grey market by providing people with a legal option. According to market experts, it will stabilize IPO prices and increase investor confidence, depending on the investors to select this rather than the grey market. This could make an enormous change to the IPO environment in India because informal trading would be brought to a formal and regulated area. When this framework is properly implemented, the grey market trading may be reduced and the IPO process in India will become more reasonable and more efficient.

Conclusion
Before the emergence of this grey market-type trading, it had not been previously asserted in India whether any law or regulation applied thereto. Hence, the “when listed” market is a strategic market intervention to fill this legal vacuum concerning grey markets for IPO trading in India. SEBI’s attempt could change the entire workings by providing a link in law between allotment and listing of shares, while the present securities laws-i.e., the SEBI Act, SCRA, or the Indian Contract Act- do not aptly cater to these informally entered transactions. However, there appear to be some fears arising from the recent parliamentary clarifications that suggested that no such platform is under immediate consideration. If implementation is to take place, primary emphasis should be given by SEBI to setting up clear legal frameworks supported by heaving participation from retail investors and ensuring settlement through recognized exchanges with a transparent mechanism. Investor acceptance and regulatory consistency shall thus be the linchpin to this initiative. Being appropriately executed, akin to international practices such as those prevalent in the U.S. Treasury “when-issued” market, it could rid the grey market from unjust speculative transactions, promote price discovery, prevent retail investors from counterparty risk, and lead the transformation of cash-based, unorganized trading into structured and supervised transactions, this being a big boost to the Indian IPO environment and investor protection.