What is Kostak Rate & Subject to Sauda in Indian IPOs?
When tracking upcoming public issues in India, you will frequently hear three informal unlisted terms: Grey Market Premium (GMP), Kostak Rate, and Subject to Sauda. Understanding what these terms signify and how their settlement formulas function gives valuable insight into real pre-listing demand.
The Three Core Unlisted Market Concepts
Grey Market Premium (GMP)
The estimated unofficial price paid per individual share above the issue price before listing. If an issue price is ₹100 and GMP is ₹40, the anticipated listing opening is ₹140.
Kostak Rate
A guaranteed lump-sum fee paid to the applicant solely for submitting an IPO bid, irrespective of whether they get allotment. The seller earns this fee even on zero allotment.
Subject to Sauda
A contract where profit is paid only if shares are successfully allotted. If no shares are allotted in the registrar lottery, the deal is nullified and ₹0 changes hands.
Real-World Scenario: Kostak vs Subject to Sauda
Suppose you apply for 1 retail lot of XYZ Tech IPO (Issue price ₹200, lot size 75 shares, application value ₹15,000). A dealer quotes:
• Kostak Rate: ₹500 per application
• Subject to Sauda Rate: ₹4,000 per allotted lot
Outcome 1: You Receive ZERO Allotment
- Kostak: You receive ₹500 in your pocket. Pure profit with zero capital committed.
- Subject to Sauda: You receive ₹0. Since no shares were allotted, the contract becomes void.
Outcome 2: You Get ALLOTTED 1 Lot
- Kostak: You deliver the allotted shares to the buyer at cost and keep your ₹500. Even if the stock opens at a +100% gain, your return is locked at ₹500.
- Subject to Sauda: You transfer the allotted shares (or listing profit) and collect your agreed ₹4,000 profit.
Comparison Table: Kostak vs Subject to Sauda
| Feature | Kostak Deal | Subject to Sauda Deal |
|---|---|---|
| Allotment Dependency | None (Paid regardless of allotment) | Strictly dependent on successful allotment |
| Typical Payout Range | ₹200 – ₹1,000 per application | ₹2,500 – ₹15,000+ per allotted lot |
| Seller Risk | Zero downside; capital never deployed | Opportunity loss if market lists higher than deal |
| Buyer Risk | High (Buyer pays cash even if allotment fails) | Moderate (Buyer only risks listing day price gap) |
| Suitability | Best for retail users who want zero-risk income | Best for applicants seeking locked profit on high-GMP IPOs |
Before engaging in informal settlements, market participants analyze informal grey market trades along with official subscription figures to evaluate fair pricing.
Critical Legal & Counterparty Caveats
Grey market deals operate completely outside the purview of SEBI, BSE, NSE, and depositories (CDSL & NSDL). There is no clearing corporation to guarantee trade settlement. If a counterparty defaults or refuses to honor a Kostak or Sauda payment after listing, the aggrieved party has no recourse through official investor dispute resolution forums.
Frequently Asked Questions (FAQs)
What does Kostak mean in simple terms?
Kostak is a fixed rupee amount paid by an informal buyer to an IPO applicant for their application, regardless of whether any shares are allotted. The applicant earns this profit even if the allotment is zero.
How does Subject to Sauda differ from Kostak?
Subject to Sauda is contingent entirely on allotment. The buyer only pays the agreed price if shares are successfully allotted to the applicant. If no shares are allotted, the transaction is cancelled with ₹0 paid.
Why do retail applicants sell applications on Kostak instead of waiting for listing?
Risk-averse applicants sell on Kostak to lock in a guaranteed cash profit upfront before the listing date, eliminating the uncertainty of allotment lotteries and opening listing day market fluctuations.
Is grey market trading legal and regulated in India?
No. Grey market trades (GMP, Kostak, and Subject to Sauda) are informal peer-to-peer over-the-counter transactions that are not recognized, regulated, or endorsed by SEBI or stock exchanges. There is no legal recourse or clearing corporation guarantee in case of counterparty default.