IPO and Kostak rates are the two-term that are very much related to each other in the world of trading. The IPO or Initial Public offering is the process where a private organization offers its shares to the public for investment.

With an IPO, public investors can also take part in the investment process of that private organization. In the Grey market, the IPO gets released before the actual launch to analyse the trends.

Grey market is something that is not run by share market bodies or the government, rather it’s the local dealers. Grey market is where the Kostak rates come into existence.

In this article, you will get to know more about Kostak rates. Please read the article till the end to know more about Kostak rates in details

What are Kostak rates?

Kostak Rate is referred to the amount which is paid to the seller by an investor who is buying the IPO before the actual launch of the IPO or IPO listing.

The bracket rates reacting to the market are the reason for the fluctuation of the Grey market premium. Kostak Rates are thus attached to the IPO Grey Market Premium such that investors can make a great profit out of it.

For example, An ABC Company is going to issue its IPO in the next 20 days, put up a price of Rs 200 per share. Now some investors don’t want to wait for these 20 days and wanted them immediately, thus they start selling and purchasing before the issuance for the IPO and as a result of this there becomes a Grey Market for the IPO.

People can sell the whole IPO application to the right Buyer but then it becomes the liability of the buyer as they are unsure about the number of shares the company will be issuing for that IPO.

In another case scenario, the buyer can agree to purchase the application at a set amount and when the IPO gets listed, the differences get settled between the buyer and seller. The amount which he gives to the seller is the Kostak Rate.

Subject to Sauda

In the Grey market, the rate with which a buyer buys IPO shares is the Kostak rate, however, there is a “Subject to Sauda” clause as well.

In the Subject to Sauda Clause, it will be mentioned that the deal will be valid only if the buyer gets the allotment during the actual listing. The subject to Sauda takes place when the buyer buys IPO shares before its listing in the share market.

The Subject to Sauda also claims that if the Buyer does not get allotment to the IPO listing then he or she is not liable to pay the Kostak Rate of the IPO application that he or she has purchased from the seller.

Subject to Sauda is directly related to Grey market during a trade of IPO share in the Grey market premium

Conclusion

Kostak Rate is a very crucial component of the Grey market. Kostak rate along with Subject to Sauda forms the backbone of the Grey market and Grey Market premium.

In the case of the Kostak Rates during the Grey market IPO sale, the liability of tax remains solely with the seller who is selling the application.

Although you will be making a profit but then the tax will be calculated on the actual amount and thus you can incur a loss as well.