Capital Market and Securities Laws · Basics of Capital Market

Primary Market and Methods of Raising Capital

Updated 11 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, preferential issue and bonus issue. To answer a question, name the method, state who can subscribe, whether funds come in, and the governing law.

Understand Primary Market and Methods of Raising Capital

The primary market is also called the new issues market. Here a company sells securities for the first time, or issues fresh securities, to investors. The money goes to the issuer. This is the key difference from the secondary market, where investors trade existing securities among themselves and the company receives nothing.

The primary market does three main jobs. It mobilises savings of investors into productive use. It helps companies, governments and institutions raise long-term funds for expansion, projects or repaying debt. It also creates the securities that are later traded and listed on stock exchanges. Merchant bankers, underwriters, registrars to an issue, bankers to an issue, debenture trustees and stock exchanges support the process.

Companies raise capital in different ways. In a public issue, securities are offered to the general public through an offer document. An initial public offer (IPO) is the first such offer by an unlisted company. A further public offer (FPO) is made by an already listed company. In a rights issue, new shares are offered only to existing shareholders in proportion to their holding. In a private placement, securities are offered to a select group of persons through a private placement offer. A preferential issue offers securities to a chosen group at a price set under the rules.

A bonus issue is different in nature. The company issues fully paid shares to existing shareholders free of cost by capitalising its free reserves, securities premium or similar permitted sources. No cash comes in. It changes the capital structure, not the funds available. Many students wrongly treat it as a fundraising method, so state this clearly in answers.

Choice of method depends on cost, speed, size of funds, and control. A public issue reaches many investors but needs heavy disclosure and compliance. A rights issue is cheaper and keeps control with existing holders. A private placement is faster with fewer formalities, but it is subject to limits on the number of persons and to the Companies Act, 2013 conditions.

Key rules to remember

Primary vs secondary market: Primary: issuer receives funds | Secondary: investors trade, issuer receives nothing; Use this one-line contrast to open any answer on the primary market.
Rights entitlement: Rights shares = Existing shares held × Rights ratio; If the ratio is 1:5, a holder of 100 shares gets 100 × 1 ÷ 5 = 20 rights shares.
Bonus shares: Bonus shares = Existing shares held × Bonus ratio; A 1:2 bonus means one new share for every two held. No cash is received by the company.
Funds raised from a fresh issue: Funds raised = Number of new shares × Issue price; Issue price = face value + premium, if any. For a bonus issue the funds raised are nil.
Private placement offer: Offer to a select group through a private placement offer letter, within the person limits and conditions of the Companies Act, 2013; Check the current limit on the number of persons in the Act before quoting a figure. Never quote a number you are unsure of.
Classification of methods: Public issue (IPO, FPO) | Rights | Private placement | Preferential | Bonus; Bonus is a capitalisation of reserves, not a method of raising fresh funds.

How to solve Primary Market and Methods of Raising Capital questions

Use this method for theory and short-note questions on the primary market and issue methods.

1Define the primary market in one line and contrast it with the secondary market.
2Identify the method asked: public issue, rights, private placement, preferential or bonus.
3State who the offer is made to and the document used, such as a prospectus, letter of offer or private placement offer.
4State whether the company receives funds. Say clearly that a bonus issue brings in none.
5Name the main regulation or Act: Companies Act, 2013 and SEBI ICDR Regulations for public, rights and preferential issues of listed companies.
6List the key advantages and limits, such as cost, speed, disclosure and control.
7If numbers are given, calculate shares and funds step by step, then write the result with units.
8End with a one-line conclusion linking the method to the company's need.

Quickest way: Three-question check for any issue method

When to use it: Use when you have little time and must compare or identify methods quickly.

Ask who is being offered: public, existing shareholders, or a select group.
Ask whether cash comes in. Public, rights, private and preferential bring cash. Bonus does not.
Ask which document and rules apply, then write the answer in that order: meaning, features, law, conclusion.

Common mistakes in Primary Market and Methods of Raising Capital

Treating a bonus issue as a method of raising capital.
Bonus issue is listed along with other issue methods in the syllabus.
Fix: Write that bonus shares are issued free by capitalising reserves and no funds are raised.
Saying a rights issue can be offered to the public.
Students confuse it with a public issue because both use an offer document.
Fix: State that rights shares are offered only to existing shareholders in proportion to their holdings.
Calling private placement a public offer with fewer formalities.
Both involve offering securities to investors.
Fix: Stress that it is an offer to a select group through a private placement offer, not to the general public.
Mixing up IPO and FPO.
Both are public issues, so the terms look alike.
Fix: IPO is the first public offer of an unlisted company. FPO is by an already listed company.
Confusing primary and secondary market functions.
Both deal with securities and investors.
Fix: Ask who receives the money. In the primary market it is the issuer.
Quoting section numbers or limits from memory without certainty.
Students try to add detail to gain marks.
Fix: Cite the Act by name and give a section or figure only when you are sure of it.

Worked examples

Example 1

Distinguish between a public issue and a rights issue.

Show the solution

Meaning: A public issue offers securities to the general public. A rights issue offers new shares only to existing shareholders.
Offer to: Public issue is open to any eligible investor. Rights issue is limited to current shareholders in proportion to their holding.
Document: Public issue uses a prospectus or offer document. Rights issue uses a letter of offer.
Cost and effort: Public issue involves higher cost, wider disclosure and intermediaries. Rights issue is generally cheaper and quicker.
Control: Public issue may dilute existing holders' control. Rights issue lets them keep their proportion if they subscribe.

Answer: A public issue raises funds from the general public through a prospectus, while a rights issue raises funds from existing shareholders in proportion to their holdings through a letter of offer. A rights issue is cheaper and protects existing control. A public issue reaches a wider investor base.

Example 2

A company has 10,00,000 equity shares of ₹10 each. It makes a rights issue in the ratio 1:5 at ₹40 per share. Find the number of shares issued and funds raised. Then it declares a 1:4 bonus issue on the enlarged capital. Find the bonus shares.

Show the solution

Rights shares = 10,00,000 × 1 ÷ 5 = 2,00,000 shares.
Funds raised = 2,00,000 × ₹40 = ₹80,00,000.
Shares after rights issue = 10,00,000 + 2,00,000 = 12,00,000.
Bonus shares = 12,00,000 × 1 ÷ 4 = 3,00,000 shares.
Funds raised from bonus = nil, as shares are issued free by capitalising reserves.

Answer: Rights issue: 2,00,000 shares and ₹80,00,000 raised. Bonus issue: 3,00,000 shares and no funds raised. Total shares after both = 15,00,000.

Exam tips

Open with a one-line definition of the primary market. It sets up the answer and earns marks quickly.
For comparison questions, use a clear point-by-point format: meaning, offered to, document, cost, control.
Always say that a bonus issue brings no funds, and show this in numerical answers.
Name the Companies Act, 2013 and SEBI ICDR Regulations where relevant, but cite section numbers only if you are certain.
In numerical questions, show ratio, shares, price and funds as separate lines.

Practice questions from Basics of Capital Market

Primary Market and Methods of Raising Capital 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 Raising Capital: frequently asked questions

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

A public issue is open to the general public through a prospectus. A rights issue is offered only to existing shareholders in proportion to their holdings. A rights issue is usually cheaper and helps existing holders keep their share of control.

What is private placement in the primary market?

It is an offer of securities to a select group of persons through a private placement offer, not to the general public. It is faster and needs fewer formalities than a public issue. It must still follow the conditions of the Companies Act, 2013.

Is a bonus issue a method of raising capital?

No. A bonus issue gives existing shareholders fully paid shares free of cost by capitalising reserves. The company receives no cash. It increases share capital and shares in issue, not funds.

Who are the intermediaries in the primary market?

Common ones are merchant bankers, underwriters, registrars to an issue, bankers to an issue and debenture trustees. They help with managing the issue, collecting applications and money, allotment and investor servicing.