Primary market

Also called: New issue market · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

The primary market (also called the new issue market) is the market where companies or governments sell new securities (shares, bonds and similar instruments) directly to investors to raise fresh capital. The money goes from the investor to the issuer.

It matters because this is how savings reach businesses as long-term money. Without a primary market, companies would depend mainly on bank loans to grow.

Explanation

How it works: primary vs secondary market

• Primary market: a security is sold for the first time. The issuer (the company or government) gets the money.
• Secondary market: investors trade existing securities among themselves on stock exchanges such as BSE (1875) and NSE. The company gets no money from these trades.
• Equity capital is money raised by selling ownership (shares).
• The company never repays it and pays no fixed interest.

• Shareholders get dividends and a share in the company's growth.

• An important catch: not every public issue brings new money to the company.

• Fresh issue means new shares are created. The money goes to the company.
• Offer for sale (OFS) means existing owners sell their shares. The money goes to those sellers, not to the company.
• Many IPOs mix both.

Routes for raising equity

• Initial Public Offering (IPO): a company's first sale of shares to the public. After the IPO, its shares are listed, which means they can be traded on a stock exchange.
• Follow-on Public Offer (FPO): a public issue by a company that is already listed.
• Rights issue: new shares offered only to existing shareholders, in proportion to what they already hold and usually at a discount.

• The right is renounceable: a shareholder who does not want the shares can sell the right to someone else.

• Qualified Institutional Placement (QIP) (2006): a listed company issues shares or convertibles only to QIBs. It is quicker and cheaper than a public issue.

• QIB (Qualified Institutional Buyer) is an institution judged expert enough to evaluate capital-market investments, such as a bank, mutual fund, insurer, foreign portfolio investor (FPI) or pension fund.

• Offer for Sale through the stock exchange (since 2012): promoters or the government sell existing shares through a special exchange window.

• Ownership changes, but no new money reaches the company.

The IPO process step by step

1. Offer documents, in order: - DRHP (Draft Red Herring Prospectus): filed with SEBI for comments and made public. - RHP (Red Herring Prospectus): gives the price band but not the final price or the number of shares. It is named after the red warning on its cover saying the document is not final. - Final prospectus: filed after the price is fixed. It gives the final price and the number of shares.

2. Price discovery: - Book building: investors bid within a price band, and demand decides the final issue price. The merchant banker keeps a "book" of the bids.

   • Rule: the cap (top of the band) can be at most 120% of the floor (bottom of the band).
   • Worked example: floor = ₹100, so the cap can be at most ₹100 × 1.20 = ₹120. A band of ₹100–₹125 is not allowed.
   • Retail investors may bid at the cut-off price. This means they accept whatever final price is set, so they do not have to guess.
   • Fixed-price issue: the price is announced in advance. Demand is known only after the issue closes.

3. Allocation in a book-built main-board issue:

Category	Share of the issue	Who they are
QIBs	up to 50%	Big expert institutions
Non-institutional investors (NIIs)	at least 15%	Individuals and corporates bidding above ₹2 lakh
Retail individual investors (RIIs)	at least 35%	Individuals bidding up to ₹2 lakh

• Worked example: In a ₹1,000 crore issue, QIBs get up to ₹500 crore, NIIs at least ₹150 crore and retail investors at least ₹350 crore.

4. Anchor investors: QIBs allotted shares one day before the IPO opens. A big name buying early signals confidence to other investors. - Anchors can take up to 60% of the QIB portion. - Lock-in (a period when they cannot sell): 50% of anchor shares for 30 days and the other 50% for 90 days.

5. Money movement: - ASBA (Application Supported by Blocked Amount), 2008, mandatory from 2016: the application money stays blocked in the investor's own bank account. It is taken out only if shares are allotted. - UPI mandate (2019): retail investors can block funds through a UPI app. - T+3 listing, mandatory from December 2023: shares must be listed within three working days after the issue closes (T = closing day). Earlier it was T+6.

6. Risk-sharing and price-support tools: - Underwriting: for a fee, an investment bank promises to buy any unsubscribed part of the issue. This makes sure the company gets its money. - Green shoe option: the issuer can allot up to 15% extra shares. A stabilising agent uses them to support the price after listing.

   • If the price falls below the issue price, the agent buys shares from the market.
   • This buying props up the price.
   • Grey market premium (GMP): the unofficial premium at which IPO shares trade before listing. It is unregulated, and its trades are not legally enforceable.

In India

• Regulator: SEBI oversees the primary market.
• Rulebook: the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("ICDR"). They cover eligibility, disclosure, allotment and lock-in periods.
• Overall size:
• Total money raised from primary markets (equity + debt) was ₹13.6 lakh crore (2025-26), 4.4% lower than in 2024-25 [1].

• Money raised through IPOs, FPOs and rights issues reached a record ₹2.3 lakh crore (2025-26), up 11.7% [1].

• IPO boom:

• 2025-26: 366 IPOs raised a record ₹1,88,616 crore [1]. The main board had 109 IPOs that raised ₹1.8 lakh crore, with a median issue size of ₹760 crore [1].
• 2024-25: 320 IPOs raised ₹1,72,328 crore [1].

• India's share of global IPO listings was 30% (2024), up from 17% in 2023 [4].

• 2025-26 reforms [1]:

• The reserved anchor portion rose to 40%: 33.33% for domestic mutual funds and 6.67% for life insurers and pension funds.
• An abridged prospectus (a short, standard summary) must now be filed at the DRHP stage.

• The minimum public shareholding is 25%. It now follows a six-tier structure based on post-issue capital, so very large companies can float smaller IPOs.

• SME exchange (BSE SME and NSE Emerge; SEBI framework from November 2008) [2]:

• 196 SME IPOs raised over ₹6,000 crore (2023-24), the highest ever [2].

• SEBI found that some firms diverted IPO money to promoter-linked shell companies. In response, it made the rules stricter [2]:

  • minimum application of 2 lots,
  • OFS capped at 20% of the issue size,
  • promoter lock-in raised from 3 to 5 years,
  • money for general corporate purposes capped at 10% of the issue or ₹10 crore, whichever is less.

• Case: Adani Enterprises withdrew its fully subscribed ₹20,000 crore FPO in January-February 2023 after the Hindenburg report.

• Going global: direct listing of Indian companies on the international exchanges of GIFT City IFSC was enabled in 2024 [3].

Don't confuse with

• Secondary market: existing shares change hands between investors, and the company gets no money. The primary market raises fresh capital for the issuer.
• Offer for Sale (OFS): it happens in a public issue, but existing owners sell their shares. No new money reaches the company, and it is the main route for disinvestment.
• Rights issue vs QIP: a rights issue goes only to existing shareholders and can be sold to others (renounceable). A QIP goes only to QIBs.
• IPO vs FPO: an IPO is the company's first public issue. An FPO is a public issue by a company that is already listed.

Prelims Hooks

• The primary market deals in new securities, so money flows to the issuer. An OFS raises no new money for the company.
• The RHP gives the price band but not the final price or the number of shares. In book building, cap ≤ 120% of floor, and retail investors may bid at the cut-off price.
• Main-board split: QIB up to 50%, NII at least 15%, Retail at least 35%. Retail means bids up to ₹2 lakh.
• Anchor investors take up to 60% of the QIB portion and are allotted one day before the IPO opens. Lock-in is 30 days on 50% and 90 days on 50%. The reserved anchor share is 40% (33.33% mutual funds + 6.67% life insurers and pension funds) [1].
• ASBA 2008 (mandatory 2016) · UPI for retail 2019 · T+3 listing mandatory December 2023. Green shoe allows up to 15% extra shares. GMP is unregulated.
• Trap: the ICDR Regulations, 2018 govern public issues. A QIP (2006) goes only to QIBs, and the exchange OFS window dates from 2012.

Mains Points

• From bank-led to market-led finance. 366 IPOs raised a record ₹1.88 lakh crore in 2025-26, and India had 30% of global IPO listings in 2024 [1][4].
• Firms rely less on bank loans, so banks face less asset-liability mismatch.
• Household savings move into productive capital, which links to the financialisation of savings.

• The anchor quota reserved for mutual funds, insurers and pension funds places domestic money beside FPIs. This makes IPOs less exposed to sudden foreign outflows [1].

• Investor protection vs ease of raising capital. The boom of 196 SME IPOs in 2023-24, along with money diverted to shell companies, shows the risks of light rules [2].

• SEBI kept the SME platform but tightened it with a 2-lot minimum, a 20% OFS cap and a 5-year promoter lock-in [2].

• The trade-off is that genuine small firms may find it harder to raise money.

• Retail participation in the fintech era. ASBA, UPI and T+3 listing have cut costs and waiting time for investors.

• But heavy oversubscription driven by GMP and social-media tips encourages listing-day speculation.
• The Adani FPO withdrawal (2023) shows that good disclosure and credible anchor investors matter more than subscription numbers.

Related concepts

• Initial Public Offering
• Red herring prospectus
• Book building
• Anchor investor
• Qualified Institutional Buyer
• Application Supported by Blocked Amount
• Green shoe option
• Underwriting
• Grey market premium
• Follow-on Public Offer

Read more

• Primary market: raising equity capital