NISM-Series-X-A: Investment Adviser (Level 1) · Securities Market Segments

Primary Market: IPO, FPO and Rights Issue Explained

Updated 11 October 2026 · Fact-checked

The primary market is where companies issue new securities and receive the money directly. An IPO is a first public offer by an unlisted company. An FPO is a further public offer by a listed company. A rights issue goes only to existing shareholders. QIPs and private placements target selected investors. Book building discovers the price.

Understand Primary Market: IPO, FPO and Rights Issue

The primary market is where a company sells new securities and the money goes to the company. The secondary market is where investors trade those securities among themselves. In the primary market, the company gets the cash. In the secondary market, it does not.

An Initial Public Offer (IPO) is the first time an unlisted company offers shares to the public and then gets listed. A Follow-on Public Offer (FPO) is a public offer by a company that is already listed. The key test is simple: if the company is already listed, it is an FPO, not an IPO. Shares can be a fresh issue (new shares, money goes to the company) or an offer for sale (existing holders sell, money goes to them).

A rights issue offers new shares only to existing shareholders, in proportion to what they hold, for example 1 share for every 4 held. The price is usually below the market price. Shareholders can subscribe, sell their entitlement, or let it lapse. A QIP (Qualified Institutions Placement) is a quick way for a listed company to raise money from qualified institutional buyers only. A private placement is an offer to a select group of persons, not the public. Under company law, it cannot go to more than 200 persons in a financial year, with some exclusions such as qualified institutional buyers and employee stock options.

Book building is the main way to price a large public issue. The company and its lead managers announce a price band (a floor price and a cap price). Investors bid within the band over the bidding days. The final issue price is the highest price at which the whole issue is fully subscribed. Investors apply through ASBA, where the money stays blocked in their own bank account until allotment. Unallotted money is simply unblocked.

Each issue type fits a different need. An IPO or FPO reaches the broad public and needs a full offer document. A rights issue rewards existing holders and avoids outside dilution of control. A QIP and a private placement are faster and cheaper but reach fewer investors.

Key formulas to remember

IPO vs FPO test: Unlisted company → IPO; already listed company → FPO; Both are public offers. Only the listing status of the issuer differs.
Book-built issue price: Issue price = highest price at which cumulative demand ≥ issue size; Add up demand from the top price downwards. Stop at the highest price where the total covers the issue.
Price band cap: Cap price must not exceed 120% of floor price; This is the SEBI ICDR limit on the width of the price band.
Rights entitlement: New shares = shares held × (rights ratio numerator ÷ denominator); Example: ratio 1:4 on 1,000 shares gives 1,000 × 1 ÷ 4 = 250 new shares.
Rights cost: Amount payable = rights shares × rights issue price; Use the rights price, not the market price.
Private placement limit: Offer to not more than 200 persons in a financial year; Excludes qualified institutional buyers and employees under ESOP, as per company law.
QIP buyers and floor price: Buyers = QIBs only; floor price = average of the weekly high and low of the closing prices of the shares during the two weeks preceding the relevant date; The floor price is worked out as at the relevant date. A discount of up to 5% on the floor price is allowed. The issuer must be a listed company and must comply with the minimum public shareholding requirements.
Book-built allocation (profitable route): QIB ≤ 50%; non-institutional ≥ 15%; retail ≥ 35% (of the net offer to the public); These percentages are of the net offer to the public, that is, after reservations such as the employee reservation. For issuers using the alternative route (not meeting profitability track record), QIB is not less than 75%, non-institutional not less than 15%, retail not more than 10%, again of the net offer.
Retail investor: Retail individual investor bids up to ₹2,00,000; Retail individual investors, and employees bidding in the employee reservation up to ₹2,00,000, can bid at the cut-off price.

How to solve Primary Market: IPO, FPO and Rights Issue questions

Most questions on this topic ask you to identify the issue type, state a rule, or work out a price or quantity. Use this order every time.

1Read the question and note who the issuer is: unlisted or already listed.
2Note who the offer is made to: the general public, only existing shareholders, only QIBs, or a select group.
3Match to the type: unlisted + public = IPO; listed + public = FPO; existing shareholders = rights issue; QIBs only = QIP; select group of up to 200 persons = private placement.
4If the question is on book building, identify the price band, the bids at each price and the issue size.
5For price questions, build a cumulative demand table from the highest price down and pick the highest price where demand covers the issue.
6For rights questions, compute entitlement from the ratio first, then multiply by the rights price, not the market price.
7Check the number or limit against the key rules (120% cap, 200 persons, ₹2,00,000 retail, 5% QIP discount) and eliminate options that break them.
8 Pick the one option that fits all conditions. If two options look alike, look for the word that changes the rule, such as 'listed', 'only' or 'at least'.
9

Quickest way: Three-question filter

When to use it: Use it for any 'which issue type' or 'which statement is correct' MCQ when time is short.

Ask: is the issuer listed? If no, it can only be an IPO or a private placement.
Ask: who can apply? Public means IPO or FPO. Existing holders means rights. QIBs only means QIP. Select persons means private placement.
Ask: is it priced by bids? Book building means a price band and a cut-off price for retail. Fixed price means one stated price.
Check any number against the key rules and cross out options that break them.

Common mistakes in Primary Market: IPO, FPO and Rights Issue

Calling a public offer by a listed company an IPO.
Students remember 'public offer' and forget that IPO means the first offer.
Fix: Always check if the issuer is already listed. If yes, it is an FPO.
Using the market price to compute the cost of a rights issue.
The question gives both prices and students grab the better known one.
Fix: Amount payable uses the rights issue price. The market price only matters for deciding whether it is attractive.
Treating a rights issue as open to the public.
Students link any new share issue with public subscription.
Fix: Rights are offered only to existing shareholders in proportion to their holdings. They can renounce their entitlement.
Confusing a QIP with a private placement.
Both skip the retail public and sound alike.
Fix: A QIP is for listed companies and goes to QIBs only. A private placement goes to a select group of up to 200 persons in a financial year and has its own rules.
Picking the price with the highest bids rather than the highest price that fills the issue.
Students read the table row by row instead of cumulatively.
Fix: Add demand from the top price downwards. The issue price is the highest price where the cumulative total reaches the issue size.
Thinking every investor can bid at the cut-off price.
The term 'cut-off' sounds general.
Fix: Only retail individual investors, and employees bidding in the employee reservation up to ₹2,00,000, can bid at the cut-off price. Institutions and larger investors must name a price.

Worked examples

Example 1

A company runs a book-built IPO of 10,000 shares with a price band of ₹100 to ₹110. Bids received: 3,000 shares at ₹110, 3,000 shares at ₹105 and 6,000 shares at ₹100. What is the issue price? (a) ₹100 (b) ₹105 (c) ₹110 (d) ₹108

Show the solution

The issue price is the highest price at which cumulative demand covers the issue size. So build cumulative demand from the highest price down and stop at the first price where the total reaches 10,000.
At ₹110: demand is 3,000 shares. This is less than 10,000, so not fully subscribed.
At ₹105: demand is 3,000 + 3,000 = 6,000 shares. Still less than 10,000.
At ₹100: demand is 6,000 + 6,000 = 12,000 shares. This is at least 10,000, so the issue is fully subscribed.
₹100 is the first price, going down from the top, where cumulative demand covers the issue. That makes it the cut-off price, and it lies inside the band ₹100 to ₹110.
The highest price at which the issue is fully subscribed is ₹100.
₹108 was never bid, and ₹105 and ₹110 do not fill the issue.

Answer: (a) ₹100

Example 2

A listed company announces a rights issue in the ratio 1:4 at ₹200 per share while the market price is ₹300. You hold 1,000 shares. How much must you pay to subscribe fully? (a) ₹50,000 (b) ₹75,000 (c) ₹1,00,000 (d) ₹2,00,000

Show the solution

Ratio 1:4 means 1 new share for every 4 held.
New shares = 1,000 × 1 ÷ 4 = 250 shares.
Amount payable uses the rights price: 250 × ₹200 = ₹50,000.
₹75,000 comes from wrongly using the market price (250 × ₹300).
₹1,00,000 comes from 500 shares × ₹200, which wrongly reads the ratio as 1:2.
₹2,00,000 comes from applying the rights price to all 1,000 shares.

Answer: (a) ₹50,000

Exam tips

In NISM-Series-X-A, a wrong answer costs 25% of the marks of that question. On a 2-mark caselet question the penalty is double that of a 1-mark question, so guess only after you have removed at least one option.
Read the issuer status and the target investors first. Most questions on issue types are solved by those two facts.
Memorise the numbers in the formula list: 120%, 200 persons, ₹2,00,000, the 5% QIP discount and the book-built allocation split. Options often tweak one number.
In caselets, do the rights or book-building arithmetic before looking at options. Distractors are built from the common slips of using the market price or the wrong ratio.
Treat 'only', 'at least', 'not more than' and 'listed' as trigger words. They usually decide which option is correct.

Practice questions from Securities Market Segments

Primary Market: IPO, FPO and Rights Issue in other exams

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

CS ExecutivePublic Issue Basics and Types of Issues

Primary Market: IPO, FPO and Rights Issue: frequently asked questions

What is the difference between IPO and FPO?

An IPO is the first public offer of shares by an unlisted company, after which it gets listed. An FPO is a further public offer by a company that is already listed. The mechanics are similar, but the issuer's listing status is different.

How does book building work in an IPO?

The company announces a price band and investors bid within it during the bidding window. Bids are collected and the demand at each price is added up. The issue price is the highest price at which the whole issue is subscribed. Retail investors can bid at the cut-off price and pay whatever final price is set.

How is a rights issue different from a QIP and a private placement?

A rights issue is offered only to existing shareholders in proportion to their holdings. A QIP is open only to qualified institutional buyers and is used by listed companies. A private placement goes to a select group of up to 200 persons in a financial year, not to the public.

What are the basic eligibility conditions for an IPO under SEBI ICDR?

The issuer must meet SEBI ICDR conditions on its track record or follow the alternative route with a higher share for qualified institutional buyers. Promoters must contribute a minimum share of post-issue capital, which is locked in for a set period. Check your workbook edition for exact figures, as these limits are updated from time to time.