Primary Market · Secondary Market · Corporate Actions
The primary market ("new issue market") is where companies raise equity or debt funds from outside investors (those not associated with promoters) through an offer of securities — also called "going public". In the primary market, investors purchase securities directly from the issuer.
Enables participation of a wider investor group at competitive terms, moving away from restrictive funding sources.
Price set by demand-supply & perceived fundamentals. G-secs priced via auction; equity via book-building.
New subscribers reduce existing shareholders' stakes, broad-basing ownership and separating ownership from management.
Higher disclosure/transparency standards prescribed by regulation for new investors.
Adds a layer of scrutiny beyond auditors/regulators — analysts, media, activists.
Promoters/early investors can profit by selling holdings via the primary market issue.
Distributes securities to many investors; mandatory listing opens up secondary market trading.
Comprehensive SEBI/Companies Act oversight of the entire issuance process protects investor interests.
| Type | Description |
|---|---|
| Public Issue | IPO or FPO — open to the public |
| Private Placement | Wholesale issue to a select set of (often institutional) investors by an unlisted company |
| Preferential Issue | Listed issuer offers securities to select persons/group on a private placement basis (excludes ESOPs/ESPS/sweat equity/foreign DRs) |
| Qualified Institutions Placement (QIP) | Listed issuer issues to Qualified Institutional Buyers (mutual funds, FPIs, insurance cos.) on private placement basis |
| Rights & Bonus Issues | Offered to existing investors as on a cut-off date — rights (buy more at a price) or bonus (free additional allotment) |
| Issuer | Notes |
|---|---|
| Central/State/Local Governments | G-Secs — T-Bills (<1 yr; only Centre issues) and bonds/dated securities (Centre & States as SGSs); risk-free "gilt-edged" |
| Public Sector Units (PSUs) | Government-majority companies; share sale by govt. = "disinvestment" (e.g., Power Grid Corp, Dec 2013: 13% fresh equity + 4% govt. stake sale); also issue tax-free bonds (e.g., NHAI, Jan 2014) |
| Private Sector Companies | Issue equity, preference shares, convertibles, corporate bonds (long-term) and commercial paper (short-term, <1 yr) |
| Banks, FIs & NBFCs | Equity, preference shares, bonds, convertible bonds, CP, CDs, securitized paper |
| Mutual Funds | New Fund Offer (NFO) — closed-end (fixed period, then returns value) or open-end (perpetual, exit anytime) |
| REITs & InvITs | Issue units publicly/privately; REIT → real estate, InvIT → infrastructure; listed; higher minimum investment than normal IPO |
| Alternative Investment Funds | Privately pooled via private placement only; cannot invite the public; may also raise debt |
First public offer of shares by a company. May be:
Made by an issuer that has already done an IPO — a follow-on issue for growth capital or to retire debt/redo capital structure; may also be via OFS, e.g., to meet minimum public shareholding norms or when promoter lock-in ends.
Company + lead manager (merchant banker) decide and disclose the issue price upfront, justified against expected performance and comparable companies' share prices.
Floor price or price band (band can be up to 20% above floor) is announced; investors bid price & quantity; retail investors can revise bids; the cut-off price is the price at which the issue gets fully subscribed — all bidders at or above cut-off get allotment.
A company issues 5,000 shares within a price band of Rs.120–Rs.144:
| Price (Rs) | No. of Shares | Cumulative Demand |
|---|---|---|
| 144 | 1,000 (A) | 1,000 |
| 140 | 1,500 (B) | 2,500 (A+B) |
| 135 | 2,500 (C) | 5,000 (A+B+C) |
| 130 | 1,000 (D) | 6,000 (A+B+C+D) |
| 120 | 500 (E) | 6,500 (A+B+C+D+E) |
The 5,000-share offer gets fully subscribed at the cut-off price of Rs.135 — all bidders at Rs.135 and above get allotment. (Retail investors may get a discount of up to 10% below the cut-off price under certain issues.)
Governed by SEBI ICDR Regulations 2018 & Companies Act 2013/1956 (also RBI norms for non-resident issues). Issuer files a prospectus (draft → SEBI comments → final filed with RoC, SEBI, exchange) detailing operations, finances, promoters, fund-use and pricing.
ASBA (Application Supported by Blocked Amount): authorizes the bank to block application money, releasing funds only on allotment. SEBI also enabled UPI-based blocking for retail applications. In book-built issues, minimum application value must fall in the SEBI-prescribed range of Rs.10,000–Rs.15,000; investors may bid at the cut-off to ensure acceptance.
Over-subscribed: bids exceed shares offered → proportionate allotment + refund of excess. Under-subscribed: all qualifying applicants get full allotment. Shares credited to demat accounts; refunds issued for partial/non-allotment.
Debt issues require a lead manager, offer document filed with SEBI/RoC, mandatory listing, and at least one credit rating (all ratings disclosed if multiple); debenture trustees (banks/FIs registered with SEBI) protect investor interests, ensuring adequacy of security cover. Rights offers (Rights Entitlements/REs) carry their own ISIN, are tradeable on exchanges, and applications must be via ASBA.
The secondary market is where already-issued securities are bought/sold between investors — transactions don't bring fresh capital to the issuer (funds only move between investors). It supports the primary market by providing liquidity, price discovery, information signalling and acting as an economic barometer.
| Function | Explanation |
|---|---|
| Liquidity | Investors can exit/enter listed securities easily and at low cost — enables investing in perpetual/long-term instruments without funds getting "blocked" |
| Price Discovery | Buy/sell transactions reflect collective investor assessment of fundamental worth; rising demand → price rises (signal of good prospects) and vice versa. Example: A Rs.10 face-value share trading near Rs.100 may guide pricing of a fresh issue near Rs.100. |
| Information Signalling | Market prices instantly reflect available information (efficient markets), pressuring issuers to perform |
| Indicating Economic Activity | Indices (Sensex, Nifty 50) act as a barometer — sustained rises signal healthy growth, declines signal weakening activity |
| Medium for Corporate Control | Underperformance → undervaluation → takeover threat → pressure for better governance (even potential takeover possibility disciplines management) |
Market Cap = Shares Outstanding × Market Price per Share
Market-cap-to-GDP ratio indicates the size/importance of a country's stock market.
Indicates trading activity (in rupees or number of trades) on a given day. Higher turnover = better liquidity.
An index tracks market movement using prices of a representative basket of (typically liquid, market-cap-weighted) shares. India's most widely tracked: S&P BSE Sensex and NSE Nifty 50. Sector indices (banking, IT, pharma, FMCG) also exist. Uses: real-time tracking, leading indicator of economic/sector performance, performance benchmark for funds.
High trade volumes increase liquidity but also systemic risk — a member's default can have catastrophic effects. Exchanges set up risk-containment systems for two functions: high-liquidity execution and guaranteed settlement.
| Mechanism | Description |
|---|---|
| Capital Adequacy Norms | Members maintain minimum paid-up capital/net worth: Base Minimum Capital (BMC, no exposure allowed against it) + Additional/Optional Capital (covers margin requirements) |
| Margins | Upfront % of dues paid by buyers/sellers when placing orders, to cover non-payment/non-delivery risk; brokers collect from clients, exchanges collect from brokers |
| Circuit Breakers & Price Bands | Index-based market-wide circuit breakers at 10%, 15%, 20% moves (either direction, triggered by Sensex or Nifty 50, whichever breaches first) halt trading market-wide. Daily price bands on individual securities: 2%, 5%, 10% or 20% (depending on whether derivatives are available on the scrip) |
| Settlement Guarantee Mechanism | Clearing corporation becomes counterparty to every trade (novation), eliminating counterparty risk and guaranteeing settlement even if a member defaults; backed by the Core Settlement Guarantee Fund (Core SGF) |
| On-line Monitoring | Real-time surveillance of positions/transactions; alerts on abnormal build-ups or inadequate margins; investigation of unusual price/volume moves |
| Price Monitoring & Action | Special margins on volatile scrips, reduced circuit filter limits, shifting scrips to trade-to-trade segment (forces delivery, reduces intraday volatility) |
| Inspection of Books | Annual inspection of trading members for compliance; violations attract disciplinary action |
An investor buys 100 shares of Company X at Rs.100 each on 1 Jan 2020 (total Rs.10,000, payable by 3 Jan 2020). To minimize default risk, both the buyer and seller must pay a percentage of dues upfront as margin. If the margin is set at 17%, the buyer pays Rs.1,700 in advance (17% × Rs.10,000).
Corporate actions have direct implications for shareholders — sharing surplus (dividend, bonus), changes in capital structure (rights, buybacks), M&A, delisting. All are regulated by the Companies Act 2013, SEBI regulations and listing agreements; require notice to regulators. The record date / book closure period determines which shareholders (in physical or demat form) are eligible to receive the benefit.
| Corporate Action | Key Features |
|---|---|
| Rights Issue | Offer of fresh shares to existing shareholders in a fixed ratio (e.g., 1:1, 1:2, 2:3) to prevent dilution of their proportionate holding; needs record date, letter of offer (filed in draft with SEBI); rights entitlements (REs) credited to demat accounts |
| Bonus Issue | Free additional shares to existing holders in a ratio (e.g., 1:3 = 1 bonus share per 3 held), funded from genuine free reserves; barred if company has defaulted on debt/FD interest or principal; needs board (and sometimes shareholder) approval |
| Dividend | Share of company profits distributed to shareholders — interim (during the year) or final (year-end); payable only out of current/P&L profits; loss-making companies, those that defaulted on preference share redemption, or used share premium/revaluation/capital redemption reserves cannot declare dividends; SEBI mandates per-share basis disclosure |
| Stock Split | Reduces face value in a defined ratio (e.g., 1:5 splits 1 share into 5; face value becomes 1/5th); number of shares rises proportionately; total value of holding and company's share capital remain unchanged; improves liquidity for high-priced shares |
| Share Buyback | Company repurchases its own listed shares from reserves/surplus; bought-back shares are extinguished, reducing share capital; boosts EPS and supports share price; eligibility requires no default on interest/principal/FD/preference redemption/dividend/term-loan interest |
| Delisting | Permanent removal from exchange listing — compulsory (regulatory/listing-agreement non-compliance) or voluntary (company buys back shares via reverse book-building) |
| Mergers & Acquisitions | Substantial acquisition of shares/voting rights changes shareholding pattern; SEBI Regulations give public shareholders an exit opportunity (open offer) |
| Offer for Sale (OFS) | Existing investors sell shares to the public; no new shares issued; proceeds go to the selling investor, not the company; lets anchor investors exit partially/fully |
A company has 10 lakh shares of Rs.10 each = Rs.1 crore issued/paid-up capital. If it issues another 10 lakh shares, existing shareholders' proportionate holding falls by half (capital doubles) — called dilution. To protect them, the Companies Act requires a rights issue first. A 1-for-1 rights issue means each shareholder gets 1 new share for every 1 held — capital doubles but proportionate holdings stay the same.
An investor holds 100 shares of face value Rs.10, trading at Rs.1,000 each (holding value = Rs.1,00,000). After a 1:5 split: 500 shares of face value Rs.2 each, trading near Rs.200 (500 × Rs.200 = Rs.1,00,000). The total value of the holding is unchanged; only the number of units and price per unit change (actual market price will depend on demand-supply).
A bonus issue in the ratio 1:3 entitles a shareholder to 1 free bonus share for every 3 shares already held — funded purely out of free reserves built from genuine profits, with no consideration from the shareholder.
1. In a book-built issue with a price band of Rs.120–Rs.144, if cumulative demand reaches the offer size of 5,000 shares at a bid price of Rs.135, the cut-off price is:
2. In an Offer for Sale (OFS) within an IPO, the proceeds go to:
3. An investor buys shares worth Rs.10,000 and the margin requirement is 17%. How much must the buyer pay upfront as margin?
4. A 1:5 stock split on 100 shares (face value Rs.10, market price Rs.1,000) results in:
5. The mechanism by which a clearing corporation becomes the legal counterparty to every trade, eliminating counterparty risk, is called: