Grey Shades of Indian Stock Market

The grey market for IPOs, known as koshtak, usually involves one person promising to buy a stock, which is to be listed, at a pre-decided premium on the issue price from someone who has applied for the shares. The premium is promised on the expectation that once listed, the stock would trade higher than the issue price and premium.

While the dabba trade, which is what the grey market trade in listed securities is called, is well known, koshtak has also been around since the 1970s.

There is a sprawling unofficial market in equity in suburban Mumbai and in the neighbouring State of Gujarat.

The unofficial market called "Dabba" (box or bucket shops) in local parlance has grown bigger in the last one year.

The modus operandi of bucket shops is to take the price of a particular stock on BSE or NSE at a point of time as benchmark and take position in the stock without paying any margins and square off the position by every Friday. So one can buy shares on Monday and have the option to square off the trade by Friday. The difference between the contracted price and the end-of-the-week price is settled between the ``Dabbawala'' (bucket shop owner) and the trader.

Advantage of this market from traders' point of view is that they do not have to pay margins on their trades and can carry forward trades overnight.

In the normal market, a trader has to pay margins on each trade and also square off the trade before the close of the market on the same day or take delivery of shares by paying the full amount.

For the person who runs these bucket shops, the advantage is that almost 70-80 per cent of the people who deal with him are unlikely to make money and so all these losses of traders are income for the bucket shop.

In a bucket shop one can trade in most of the liquid stocks anytime during the official trading hours.

Prominent places where they have come up are Andheri, Malad, Kandivli, Borivli, Ghatkoper and Mulund.

But the main centre of bucket shop is still Gujarat with places such as Surat, Rajkot and Ahmedabad taking the lead.

The unofficial market is highly risky for traders as well for the entire market. In addition, the market could be in loss, if the bucket shop owner shifts his positions to the official market (to minimise his losses) and is not able to pay the money to the stockbroker.