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Financial Management and Business Data Analytics · Capital Market

Primary Market and Methods of Issuing Securities

Updated 10 October 2026 · Fact-checked

The primary market is where a company issues new securities and receives the money directly. Methods include public issue (IPO or FPO), rights issue, private placement, bonus issue and book building. To answer, name the method, say who is offered the securities, and state whether cash comes in.

Understand Primary Market and Methods of Issuing Securities

The primary market is the market for new securities. When a company issues shares or debentures for the first time or again, the money paid by investors goes to the company. This is different from the secondary market, where investors trade existing securities among themselves and the company receives nothing.

A company can approach investors in different ways. In a public issue, it invites the general public to subscribe. A first-time public issue is an Initial Public Offer (IPO). A later public issue by an already listed company is a Follow-on Public Offer (FPO).

In a rights issue, new shares are offered only to existing shareholders, in proportion to their holding. They can accept, decline or, where the rules permit, renounce the right in favour of someone else. In a private placement, securities are offered to a select group of persons, not the general public. This is quicker and cheaper, but the investor base is limited and legal limits apply on how many persons can be approached.

A bonus issue is different in one key way: no cash comes in. The company capitalises its free reserves and gives fully paid shares to existing shareholders free of cost. Total net worth does not change. Only the split between reserves and share capital changes.

Book building is a method of price discovery, used within a public issue. The company sets a price band. Investors bid within the band, and the final issue price is fixed after the bids are collected, based on demand. It is not a separate type of issue. It is a way of pricing one.

Key rules to remember

Rights entitlement
New shares offered = Existing shares held × Rights ratio
For a 1:4 rights issue, a holder of 400 shares is offered 100 new shares.
Theoretical ex-rights price (TERP)
TERP = (Market price × Old shares + Issue price × New shares) ÷ (Old shares + New shares)
Use for the same block of shares, such as 4 old and 1 new.
Value of a right (per share)
Value of right = Cum-rights market price − TERP
Equals the gain from buying one new share at the rights price, per old share held, after adjusting for the ratio.
Bonus issue effect
Free reserves fall and share capital rises by the same amount; net worth is unchanged
Number of shares rises, so EPS and market price per share usually fall in proportion, all else equal.
Issue size
Funds raised = Number of shares issued × Issue price
Applies to public, rights and private placement. For a bonus issue, funds raised = nil.

How to solve Primary Market and Methods of Issuing Securities questions

Use this method for both theory questions and numerical questions on methods of issue.

  1. 1Identify the method asked: public issue, rights, private placement, bonus or book building. Remember book building is a pricing method.
  2. 2For theory, write the meaning in one line, then who is offered the securities, then the pricing, then whether cash is raised.
  3. 3Add two or three advantages and limitations in separate bullet points.
  4. 4For comparison questions, draw your answer in points: basis of offer, investors, cash inflow, effect on net worth, cost and time.
  5. 5For numerical questions, write the data first: old shares, ratio, issue price, market price.
  6. 6Compute shares issued, then funds raised or reserves capitalised, then TERP or value of right if asked.
  7. 7Check the answer: after a bonus issue, net worth is unchanged; after a rights issue, net worth rises by the cash raised.
  8. 8State a one-line conclusion, for example whether the shareholder gains or loses.

Quickest way: Four-question check for any method of issue

When to use it: Use when you have little time, especially in MCQs and short comparison questions.

  1. Who is offered the securities? Public, existing shareholders, selected persons.
  2. Does cash come in? Yes for public, rights, private placement. No for bonus.
  3. How is the price set? Fixed price, book-built price band, or negotiated.
  4. Does ownership proportion change? Not for a bonus issue or a fully taken-up rights issue.
  5. Then match the answers to the method and write.

Common mistakes in Primary Market and Methods of Issuing Securities

  • Treating book building as a separate method like rights or bonus.

    Lists in books show it beside other methods.

    Fix: Say it is a price discovery process used in a public issue, with a price band and bids.

  • Saying a bonus issue raises funds.

    Students confuse new shares with new money.

    Fix: Remember that bonus shares are issued by capitalising reserves, so cash raised is nil and net worth is unchanged.

  • Confusing a rights issue with a public issue because both bring in cash.

    Both involve new shares and payment.

    Fix: Check who is offered: only existing shareholders in proportion for rights, the general public for a public issue.

  • Calling private placement a public offer.

    Both can be to many investors.

    Fix: Private placement is to selected persons, not an invitation to the general public, and is quicker and cheaper.

  • Using the wrong share count in TERP.

    Students add total shares of the company to the formula by mistake.

    Fix: Use one consistent block, such as 4 old and 1 new share, or use total old and total new shares together.

Worked examples

Example 1

Asha Ltd has 10,00,000 equity shares of ₹10 each. The market price is ₹60. It makes a rights issue of 1 share for every 4 held at ₹40 per share. Calculate the funds raised, the theoretical ex-rights price and the value of a right per old share held.

Show the solution
  1. New shares = 10,00,000 × 1/4 = 2,50,000 shares.
  2. Funds raised = 2,50,000 × ₹40 = ₹1,00,00,000.
  3. TERP: take 4 old and 1 new share. Total value = (4 × ₹60) + (1 × ₹40) = ₹240 + ₹40 = ₹280.
  4. TERP = ₹280 ÷ 5 = ₹56.
  5. Value of a right per new share = ₹56 − ₹40 = ₹16 for the right to buy one new share.
  6. Per old share held, the right is 1/4 of this = ₹4. Check: cum-rights price ₹60 − TERP ₹56 = ₹4.

Answer: Funds raised ₹1,00,00,000; TERP ₹56; value of a right ₹4 per old share (₹16 per new share).

Example 2

Meera Ltd has equity share capital of ₹50,00,000 (5,00,000 shares of ₹10 each), securities premium ₹10,00,000 and general reserve ₹40,00,000. It declares a bonus issue of 1 share for every 5 held. State the number of bonus shares, the new share capital and the reserves left, using the general reserve first.

Show the solution
  1. Bonus shares = 5,00,000 × 1/5 = 1,00,000 shares.
  2. Amount capitalised = 1,00,000 × ₹10 = ₹10,00,000.
  3. New share capital = ₹50,00,000 + ₹10,00,000 = ₹60,00,000.
  4. Take the amount from general reserve: ₹40,00,000 − ₹10,00,000 = ₹30,00,000.
  5. Securities premium stays at ₹10,00,000, so total reserves = ₹40,00,000.
  6. Net worth before = ₹50,00,000 + ₹10,00,000 + ₹40,00,000 = ₹1,00,00,000. After = ₹60,00,000 + ₹40,00,000 = ₹1,00,00,000. Unchanged, and no cash is raised.

Answer: 1,00,000 bonus shares; share capital ₹60,00,000; reserves ₹40,00,000 (general reserve ₹30,00,000 and securities premium ₹10,00,000); net worth unchanged at ₹1,00,00,000.

Exam tips

  • For rights versus bonus, always cover four points: who gets it, cash inflow, price paid and effect on net worth.
  • In MCQs, 'no cash raised' or 'capitalisation of reserves' points to a bonus issue.
  • Show the TERP working line by line. Step marks are given even if the final number slips.
  • For book building, mention the price band, bids by investors and the final price fixed on demand.
  • Write short bullet points for advantages and limitations. They score faster than long paragraphs.

Practice questions from Capital Market

Primary Market and Methods of Issuing Securities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Primary Market and Methods of Issuing Securities: frequently asked questions

What is the difference between a rights issue and a bonus issue?

In a rights issue, existing shareholders pay cash for new shares, so the company raises funds. In a bonus issue, shares are given free by capitalising reserves, so no cash comes in. Net worth rises in a rights issue and is unchanged in a bonus issue.

What is the difference between a public issue, a rights issue and a private placement?

A public issue invites the general public. A rights issue is offered only to existing shareholders in proportion to their holding. A private placement is offered to a select group of persons. All three raise cash.

What is the book building process in an IPO?

Book building is a way to discover the issue price. The company sets a price band, investors bid within it, and the final price is fixed based on the demand collected. It is used within a public issue.

Is an IPO a primary market or secondary market activity?

An IPO is a primary market activity because the company issues new shares and receives the money. After listing, trading of those shares among investors takes place in the secondary market.