Primary market: raising equity capital

Detail

1. What the primary market is

• Primary market = the market where companies or governments sell new securities straight to investors to raise fresh capital.
• Money goes from the investor to the issuer (the company).

• The secondary market is different. There, investors trade shares that already exist among themselves, on stock exchanges such as BSE (1875) and NSE. The company gets no money from these trades.

• Equity capital = 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.

• How big it is:
• Total money raised from primary markets (equity + debt) was ₹13.6 lakh crore (2025-26), 4.4% lower than 2024-25 [2].
• Money raised through IPOs, FPOs and rights issues reached a record ₹2.3 lakh crore (2025-26), up 11.7% [2].

2. The IPO and its rulebook

• Initial Public Offering (IPO) = a company's first sale of shares to the public. After the IPO, its shares are listed (they can be traded on a stock exchange).
• Rulebook: the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 — "ICDR". They set:
• who is eligible to issue shares,
• what the company must disclose,
• how shares are allotted,

• lock-in periods (times during which some holders cannot sell).

• Fresh issue vs OFS inside an IPO:

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

3. Offer documents, in order

1. DRHP (Draft Red Herring Prospectus), filed with SEBI for comments. It is made public so investors can read it. - From 2025-26, a short, standard summary (the abridged prospectus) must also be filed at the DRHP stage and put online [2].

2. Red Herring Prospectus (RHP), which gives company details and the price band. It does not give the final price or the number of shares. - It is called "red herring" because of the red warning on its cover saying the document is not final.

3. Final prospectus, filed after the price is fixed. It gives the final price and the number of shares.

4. How the price is set: book building vs fixed price

• Book building = investors bid within a price band, and demand decides the final price.

• The merchant banker keeps a "book" of the bids. The price at which demand clears the issue becomes the issue price.

• Rule on the band: 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.

• Cut-off price: retail investors may tick "cut-off". This means they accept whatever final price is set, so they do not have to guess.

• Fixed-price issue = the alternative. The price is announced in advance and investors only choose how many shares to apply for. Demand is known only after the issue closes.

5. Who gets what: allocation in a book-built issue (main board)

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

• Qualified Institutional Buyer (QIB) = an institution judged expert enough to evaluate capital-market investments. Examples: banks, mutual funds, insurers, foreign portfolio investors (FPIs) and pension funds.
• In main-board IPOs, NII shares are allotted by draw of lots, not in proportion to bid size [3].
• Worked example: In a ₹1,000 crore issue, QIBs get up to ₹500 crore, NIIs at least ₹150 crore and retail at least ₹350 crore.

6. Anchor investors

• Anchor investor = a QIB that is 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: 50% of anchor shares for 30 days and the other 50% for 90 days after allotment. This stops anchors from selling at once on listing day.
• 2025-26 reforms [2]:
• The old categories I (up to ₹10 crore) and II (₹10–250 crore) were merged into one category for allocations up to ₹250 crore. This category allows 2 to 15 allottees, with a minimum of ₹5 crore each.
• Above ₹250 crore: minimum 5 and maximum 15 investors, plus 15 more for every extra ₹250 crore.

• The reserved anchor portion rose to 40%: 33.33% for domestic mutual funds and 6.67% for IRDAI-registered life insurers and PFRDA-registered pension funds. The aim is to bring in more long-term domestic money.

• Worked example: ₹1,000 crore IPO → QIB portion ₹500 crore → anchors up to 60% = ₹300 crore → 40% of that (₹120 crore) is reserved. About ₹100 crore goes to mutual funds and about ₹20 crore to insurers and pension funds.

7. ASBA, UPI and T+3: how the money moves

• ASBA (Application Supported by Blocked Amount) = the application money stays blocked in the investor's own bank account. It is taken out only if shares are allotted.
• Before ASBA: money left the account at once, and refunds for failed bids took weeks. Now the money never leaves the account, and the investor keeps earning savings interest on it.

• Introduced 2008; made mandatory from 2016.

• UPI mandate (2019): retail investors can block funds through a UPI app. This is a fintech-era step that made applying easier from mobile phones.

• T+3 listing: shares must be listed within three working days after the issue closes (T = closing day). Mandatory from December 2023; earlier it was T+6.
• Faster listing → money is blocked for fewer days → less risk for investors.

8. Price support and risk-sharing tools

• Green shoe option = lets the issuer allot up to 15% more shares than the issue size. 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, which props up the price.

• Worked example: ₹1,000 crore issue → up to ₹150 crore of extra shares.

• Underwriting (capital-market sense) = an investment bank promises, for a fee, to buy any unsubscribed part of an issue. This makes sure the company gets its money. (Underwriting in the insurance sense is covered in section 11.)

• Grey market premium (GMP) = the unofficial premium at which IPO shares trade informally before listing. It is unregulated (outside SEBI and the exchanges) and is only a rough guide to listing demand. Trades are not legally enforceable.

9. Other routes to raise equity

• Follow-on Public Offer (FPO) = a public issue by a company that is already listed.

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

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

• It is the main route for disinvestment (see industrial-policy-psu-msme).

• No new money reaches the company. Only ownership changes.

• Rights issue = new shares offered to existing shareholders in proportion to their holdings, usually at a discount.

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

• There were 139 rights issues in 2025-26 (142 in 2024-25). The money raised rose 134.2%, and one very large issue made up about 54% of the total [2].

• Qualified Institutional Placement (QIP) (2006) = a listed company issues shares or convertibles only to QIBs.

• It is quicker and cheaper than a public issue.

• The placement document was simplified in 2025-26: risk factors, finances and business are now given as short summaries [2].

• Minimum public offer and minimum public shareholding (MPO/MPS):

• A listed company must eventually have at least 25% public shareholding (MPS).
• In 2025-26 SEBI replaced the old rules with a six-tier structure based on post-issue capital. Very large companies can now float smaller IPOs and get longer timelines to reach 25% [2].

10. IPO market size (updates the scaffold)

• 2024-25: 320 IPOs raised ₹1,72,328 crore [2].
• In April–December 2024, IPO numbers rose 32.1% to 259, and money raised almost tripled to ₹1,53,987 crore [5].

• India's share of global IPO listings was 30% (2024), up from 17% (2023) [5].

• 2025-26: 366 IPOs raised ₹1,88,616 crore, a new record [2]. (NCERT scaffold: "record in 2024-25".)

• Main board: 109 IPOs, ₹1.8 lakh crore raised, median issue size ₹760 crore [2].
• SME listings: a record 257 (241 in 2024-25) [2].
• IPO + FPO money fell slightly (−0.9%) to ₹1.9 lakh crore, even though more companies listed [2].

11. SME exchange

• SME exchange = a separate platform with lighter listing rules for small and medium enterprises (SMEs). Examples: BSE SME (2012) and NSE Emerge.
• SEBI first set the framework in November 2008 [3].

• By 15 October 2024: 565 companies had listed on NSE SME and 524 on BSE SME. Of these, 322 had moved up to the Main Board [3].

• Why SEBI tightened the rules:

• SME IPOs boomed: 196 IPOs raised over ₹6,000 crore (2023-24), the highest ever. Another 159 raised over ₹5,700 crore by 15 October 2024 [3].

• SEBI found some firms diverting IPO money to promoter-linked shell companies and booking fake sales in a circle among related parties to hype their shares [3].

• New rules (SEBI Board review under ICDR; scaffold dates it 2025, verify current) [3]:

• Minimum application = 2 lots (above ₹2 lakh). This keeps small, speculative retail money out.
• NII allotment by draw of lots, the same as on the main board.
• Minimum allottees raised from 50 to 200.
• OFS capped at 20% of the issue size. Each seller can sell at most 20% of their holding.
• Promoter lock-in on the minimum promoter contribution raised from 3 to 5 years.
• Money for general corporate purposes (GCP) capped at 10% of the issue or ₹10 crore, whichever is less.
• A monitoring agency is needed if the fresh issue is above ₹20 crore (the earlier limit was ₹100 crore).
• IPO money cannot be used to repay loans from promoters or related parties.

12. Social stock exchange (SSE)

• Social Stock Exchange (SSE) = a segment of an exchange where non-profit (NPO) and for-profit social enterprises raise funds. SEBI set up the framework in 2022.
• Zero Coupon Zero Principal (ZCZP) instrument = what NPOs issue. It pays no interest and the principal is not returned, so it is essentially a donation routed through the exchange.
• Social-impact reporting is mandatory. It shows donors what their money achieved.
• 2025-26 reforms [2]:
• Trusts registered under the Registration Act, 1908 were added as eligible NPOs.
• Eligible activities were aligned with Schedule VII of the Companies Act (the CSR list).
• Minimum investment in Social Impact Funds was cut from ₹2 lakh to ₹1,000, the same as the ZCZP minimum.

13. Going global: depository receipts and direct listing

• Depository receipt (DR) = a certificate issued by a depository bank abroad that stands for shares of a foreign company.
• ADR (American Depository Receipt) trades in the USA. GDR (Global Depository Receipt) trades in other markets. Both let Indian firms raise money abroad.
• IDR (Indian Depository Receipt) = lets a foreign firm raise money in India. Standard Chartered (2010) is the only IDR ever issued.

• The Depository Receipts Scheme 2014 liberalised the regime.

• Direct overseas listing = an Indian company lists its shares directly on a foreign exchange, without depository receipts. It was enabled in 2024 [4]:

• The Department of Economic Affairs amended the FEM (Non-debt Instruments) Rules, 2019 and notified the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme [4].
• The Ministry of Corporate Affairs issued the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 [4].
• It started with the international exchanges in GIFT City IFSC. Initially only unlisted public companies could use it [4].
• The aim is to give start-ups and tech firms access to global capital in foreign currency at global valuations [4].

14. New-age instruments

• Differential voting rights (DVR) shares = shares with more or fewer votes than ordinary shares.
• Founders of new-age (tech) firms can raise capital without losing control of the company.

• Example: founder shares with 10 votes each against 1 vote for an ordinary share.

• Start-up "reverse flipping" = start-ups that moved their holding company abroad shift it back to India. In 2025-26 SEBI relaxed IPO rules for them [2]:

• The one-year pre-IPO holding rule for OFS was eased for shares that came from converting compulsorily convertible securities.

• Founders who become promoters can keep ESOPs (employee stock options) granted at least one year before the DRHP.

• SPAC (Special Purpose Acquisition Company) = a shell company (a company with no business of its own). It raises money through an IPO only to buy a private firm, which then becomes public without its own IPO.

• Not permitted on mainland Indian exchanges, because of worries about disclosure and investor protection. Allowed in the IFSC (GIFT City).

Prelims Hooks

• The primary market deals in new securities and raises fresh capital for the issuer. An OFS raises no new money for the company.
• The Red Herring Prospectus gives the price band but not the final price or the number of shares. The final prospectus gives both.
• In book building, the cap ≤ 120% of the floor (floor ₹100 → cap at most ₹120). Retail investors may bid at the cut-off price.
• Main-board book-built split: QIB up to 50%, NII at least 15%, Retail at least 35%. Retail = bids up to ₹2 lakh.
• Anchor investors: up to 60% of the QIB portion, 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) (2025-26) [2].
• ASBA 2008 (mandatory 2016) · UPI for retail 2019 · T+3 listing mandatory December 2023.
• Green shoe = up to 15% extra shares, used to stabilise the price after listing. GMP is unregulated.
• QIP (2006) goes only to QIBs. A rights issue goes only to existing shareholders and is renounceable. Exchange OFS (2012) is the disinvestment route.
• IDR: only Standard Chartered (2010). SPACs: allowed only in the IFSC. Direct listing (2024): first on GIFT IFSC exchanges [4].
• SSE: NPOs issue ZCZP instruments (no interest, no principal returned). Minimum Social Impact Fund investment is now ₹1,000 [2].

Mains Points

• Deeper markets, more domestic ownership. 366 IPOs raised a record ₹1.88 lakh crore in 2025-26, and India had 30% of global IPO listings in 2024 [2][5]. This shows a shift from bank-led to market-led financing of companies.
• Firms rely less on bank loans → banks face less asset-liability mismatch.
• Household savings move into productive capital (link to financialisation of savings and SIP flows).

• SEBI's reserved anchor quota for mutual funds, insurers and pension funds means domestic money sits beside FPIs. This makes IPOs less exposed to sudden foreign outflows [2].

• Investor protection vs ease of raising capital. The SME IPO froth (196 IPOs in 2023-24, fund diversion to shell companies) shows the risks of light rules [3]. SEBI's response kept the platform but made it harder to misuse:

• 2-lot minimum application, 20% OFS cap, 5-year promoter lock-in, 10% GCP cap [3].

• The trade-off: stricter rules may shut out genuine small firms that need finance.

• Retail protection in a fintech era. ASBA, UPI and T+3 have cut costs and waiting time for investors. But heavy oversubscription driven by GMP and social-media tips creates listing-day speculation. Examples like the Adani FPO withdrawal (2023) show that disclosure and credible anchors matter more than subscription numbers.

• Global capital access and sovereignty. Direct listing on GIFT IFSC (2024), the DR Scheme 2014 and DVRs help new-age firms raise foreign-currency capital without losing control [4]. This supports the IFSC's aim to bring offshore financial activity back to India. SPACs stay limited to the IFSC because of governance and disclosure concerns.