The primary market enables the companies and governments to raise money by issuing new securities to the public. It gives investors an opportunity to buy shares in the company at a comparatively lower price than the prevailing market price.
For investors to make the right choice while buying from the primary market, it is important to understand the different types of issues and their purposes.
This article explains the inner workings of the primary market and delves deeper into the various types of corporate issues.
Key Takeaways for Investors
- IPOs and FPOs are open to all investor categories (retail, HNI, and QIB) and follow the heaviest disclosure and pricing scrutiny under SEBI ICDR Regulations.
- Only current shareholders get the offer, in proportion to their holding, which is why rights issues don't dilute your ownership percentage if you fully subscribe.
- Preferential allotments and QIPs let listed companies raise money quickly from a select group, bypassing the full public-issue process but with mandatory lock-ins to prevent quick flipping.
- Bonus shares aren't free for tax purposes. They cost nothing to acquire, but the entire sale proceeds become taxable capital gains, with the holding period starting fresh from the allotment date.
- SEBI’s T+3 listing timeline means retail investors receive shares or get their money back within three working days of an IPO closing.
- ASBA (Application Supported by Blocked Amount) blocks the application amount in the investor’s bank account instead of debiting it upfront. For retail/individual investors using UPI, the block limit is ₹5 lakh per application. Funds stay blocked only till allotment; unallotted amounts are released automatically.
How is Primary Market Different From Secondary Market?
The primary market is where issuers raise fresh capital directly from investors. Once listed, the same securities trade among investors in the secondary market.
| Parameter | Primary Market | Secondary Market |
| Nature | New issue market | Market for already-issued securities |
| Parties | Issuer and Investor | Only investors |
| Price | Fixed by issuer + merchant bankers or discovered via book-building | Determined by market demand-supply |
| Purpose | Raise capital for expansion, debt repayment, acquisitions, etc. | Provide liquidity and price discovery |
| Listing | Securities get listed after the issue closes | Continuous trading on exchanges |
Different Types of Primary Market Issues
Depending upon the objective of the issuer and the nature of the security, the companies tend to issue the following types of primary market issues:
Public Issue
As the name suggests, a public issue entails offering securities to the public. In other words, anyone who is eligible, including the retail, HNIs (investors with a high net worth), and institutional investors, can apply for the shares issued through this method. A public issue can further be bifurcated into the following two categories:
Initial Public Offering (IPO)
An Initial Public Offering Initial Public Offering is the process by which a private, unlisted company offers its shares to the public for the first time, simultaneously paving the way for its listing on stock exchanges.
- Purpose: To raise institutional and retail capital, unlock liquidity for early backers, and enhance corporate visibility.
- Price mechanisms: An IPO can be conducted through two main pricing routes:
- Fixed Price Issue: The company, in consultation with underwriters, pre-determines a single price for the shares. Investors apply at this fixed cost, and demand is evaluated only after the issue closes.
- Book Building Issue: The company specifies a price band (e.g., ₹500 to ₹525 per share). Investors bid within this band based on their evaluation. The final cut-off price is discovered through institutional and retail demand.
Follow-on Public Offering (FPO)
When a company that is already publicly listed and traded on stock exchanges decides to issue subsequent batches of shares to raise additional capital, it is known as a Follow-on Public Offering (or Further Public Offering).
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Types of FPOs:
- Dilutive FPO: The company issues brand-new equity shares, increasing the total share count. While this infuses fresh cash directly into corporate coffers, it dilutes existing ownership percentages and Earnings Per Share (EPS).
- Non-Dilutive FPO (Offer for Sale / OFS): Promoters or major institutional stakeholders sell their existing privately held shares to the public. No new shares are created, meaning total outstanding shares and EPS remain unaffected, and proceeds go directly to the selling shareholders rather than the company.
Rights Issue
As the name suggests, a rights issue rights issue is a type of capital issue wherein the company issues new shares to the existing shareholders at a predetermined discount. The existing shareholders can apply for the new shares in proportion to their current holdings of the share on a specific record date.
Purpose of a Rights Issue:
- A rights issue helps the company raise additional capital from the existing shareholders without having to bear huge underwriting expenses.
- The additional capital can help in reducing the debt of the company or funding the expansion of the business.
- The shareholders can either exercise their rights, renounce them, or let them lapse.
Bonus Issue
A bonus issue bonus issue is a corporate action through which the company issues additional shares to the shareholders free of cost.
The company rewards its existing shareholders by issuing free additional shares out of its accumulated free reserves or share premium account.
- Distributed based on current holdings (e.g., a 2:1 bonus means you get 2 new shares for every 1 share you own).
- It increases market liquidity, expands the capital base without altering the proportional ownership of shareholders, and makes stocks more affordable for retail buyers.
Private Placement and Preferential Allotment
A company can raise money from the public by issuing shares in the primary market. However, instead of issuing shares to all members of the public, the company can raise capital by issuing the shares to a select group of investors. The following are the two types of placements:
Preferential Issue
- It refers to a private placement wherein the listed company issues equity shares or convertible securities to a selected group of investors.
- The preferential allotment helps the company to raise funds quickly and meet its short-term obligations like paying off debts or making acquisitions.
Qualified Institutional Placement (QIP)
- It is a special type of private placement wherein the listed company raises funds from the Qualified Institutional Buyers or QIB without having to file lengthy documents with SEBI for each issue.
| Issue Type | Target Audience | Objective | Impact on Share Count | Capital Flow Direction |
| Initial Public Offering (IPO) | General Public & Institutions | Raise first-time equity capital & list on exchanges | Increases (Dilutive) | Investor → Company |
| Follow-on Public Offering (FPO) | General Public & Institutions | Raise supplementary capital or liquidity | Increases (Dilutive) OR No Change (OFS) | Investor → Company (or Promoter) |
| Rights Issue | Existing Shareholders Only | Quick internal fundraising & debt reduction | Increases | Investor → Company |
| Bonus Issue | Existing Shareholders Only | Reward stakeholders & boost liquidity | Increases (Capitalisation of Reserves) | None (Internal bookkeeping) |
| Preferential Issue / QIP | Select Group of Investors / QIBs | Fast-track funding & strategic partnerships | Increases | Investor → Company |
Category Quotas and Allotment Rules
In a standard book-built mainboard IPO (under Regulation 6(1) of SEBI ICDR):
- QIB (Qualified Institutional Buyers): Not more than 50% of the net offer (5% of this portion reserved for mutual funds). Maximum 60% of the QIB portion can go to anchor investors.
- NII (Non-Institutional Investors): Not less than 15%. Further split — one-third for Small NII (₹2 lakh–₹10 lakh) and two-thirds for Big NII (above ₹10 lakh).
- RII (Retail Individual Investors): Not less than 35%. Application limit is ₹2 lakh. Allotment is by lottery if oversubscribed.
Companies that do not meet the profitability criteria (Regulation 6(2)) must allocate at least 75% to QIBs, with retail limited to 10%.
Benefits of Investing in Primary Market
An investment in the primary market can be highly rewarding for the common investors for the following reasons:
- Early-bird rewards: By investing in the primary market, the investor gets an opportunity to buy the shares of the company even before they get listed on the stock exchanges. Thereby enabling them to profit from the listing gains.
- Direct contribution to the economy: The money raised through the primary market facilitates the issuer company in achieving its business objectives. Thus, fueling the growth of the economy.
- Reduced chances of price rigging: Unlike the shares of the secondary market, the shares issued in the primary market either have a fixed price or the price discovery takes place through the book-building process. Therefore, making it almost impossible for the promoters to rig the share price.
Risks of Primary Market Investments
- Asymmetry of information: In case of an IPO, the retail investors have less information about the company than the institutional investors. This makes them more vulnerable to risks arising due to lack of information.
- Risk of non-allocation: With huge demand for certain issues, there is a risk involved in not getting the number of shares applied for by the investor.
- Lock-in period and price volatility: The shares allocated to the retail investors through the primary market issues usually witness a huge jump in their prices on the day of listing because of the huge demand from the investors. Furthermore, the investor may also not be able to exit the investment at an opportune time due to the lock-in period.
Tax Implications on Primary Market Issues
There is no special exemption for any issue type, once shares are listed and Securities Transaction Tax (STT) is paid on sale. The standard Section 111A (STCG) and Section 112A (LTCG) rules apply uniformly.
| Issue Type | Cost of Acquisition | Capital Gains Tax on Sale (Listed Shares) | Holding Period Clocks From |
| IPO / FPO Shares | Issue price paid | STCG at 20% ($\le 12$ months) / LTCG at 12.5% above ₹1.25 lakh ($>12$ months) | Date of credit/allotment in Demat |
| Rights Shares | Price actually paid to subscribe to the rights | Same STCG/LTCG rules apply | Date of allotment of the rights shares |
| Bonus Shares | ₹0 (since they are issued free) | Same STCG/LTCG rules apply; because cost is ₹0, the entire sale proceeds count as capital gains | Date of allotment of the bonus shares |
| Preferential / QIP Shares | Price paid in the private/preferential placement | Same STCG/LTCG rules apply, subject strictly to the statutory lock-in period expiring first | Date of allotment |
SEBI Compliance Rules for Primary Market Issues
- DRHP Filing: Mandatory at least 30 days before a public issue opens.
- Promoter Lock-in: 20% of post-issue capital locked for 18 months in an IPO; excess promoter holding released in two tranches (staggered 1-year / 2-year split since March 2025).
- Anchor Investor Lock-in: 50% of allocation locked for 30 days, remaining 50% for 90 days.
- Preferential Allotment Lock-in: One year from allotment, plus special resolution approval.
- Private Placement Cap: No single placement can be offered to more than 200 persons in a financial year, or it is reclassified as a public issue.
- Listing Timeline: T+3 working days from issue closure for all public issues.
Conclusion
The primary market facilitates investors with an opportunity to fund the business ideas of the issuers. By understanding the different types of primary market issues, the investors can make informed decisions while investing in new issues.
After identifying the most suitable type of issue, it is essential for the investor to undertake extensive research and analysis before taking the plunge.
