NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)

Primary Market and IPO Process in India Explained

Updated 11 October 2026 · Fact-checked

The primary market is where companies issue new securities and receive the money directly. Routes include IPO, FPO, rights issue and private placement. To solve exam questions, identify who the issuer sells to, whether the company is already listed, and whether fresh money comes in. A bonus issue raises no money.

Understand Primary Market and IPO Process

The primary market is where securities are created and sold for the first time. The company issues shares and the money goes to the company. In the secondary market (stock exchanges), investors trade existing shares with each other and the company gets nothing.

An Initial Public Offer (IPO) is the first time an unlisted company offers shares to the public. After the IPO, the shares get listed on a stock exchange. A Follow-on Public Offer (FPO) is a further public offer by a company that is already listed. So the difference is simple: IPO is by an unlisted company, FPO is by a listed company.

An offer can have a fresh issue (new shares, money goes to the company) and an offer for sale (OFS) (existing shareholders sell their shares, money goes to the sellers, not the company). Many IPOs have both.

Pricing can be a fixed price or a book building process. In book building, the issuer gives a price band, investors bid within it, and the final issue price is found from the bids received. Investors apply through the ASBA facility, where the application money stays blocked in your bank account until shares are allotted. Allotment is then done and shares are credited to the demat account, followed by listing.

Other routes: a rights issue offers new shares only to existing shareholders in a stated ratio, usually at a discount, and raises money. A bonus issue gives free additional shares to existing shareholders out of reserves, and raises no money. A private placement sells securities to a select group of investors, not to the public at large. Always check the investor category too: retail, non-institutional and qualified institutional buyers are treated differently in allocation.

The market regulator, SEBI, prescribes the disclosure rules for public issues. The offer document tells investors about the company, its risks and the use of funds. Read it as the main source of information.

Key formulas to remember

IPO vs FPO: IPO = first public offer by an unlisted company; FPO = further public offer by an already listed company; The deciding test is whether the company is already listed.
Fresh issue vs OFS: Fresh issue: money goes to the company; OFS: money goes to the selling shareholders; Only a fresh issue increases the company's share capital.
Rights issue vs bonus issue: Rights: existing shareholders pay and the company raises money; Bonus: free shares, no money raised; Both go only to existing shareholders.
Rights entitlement: New shares entitled = existing shares × (rights ratio new ÷ old); For a 2:5 ratio, you get 2 new shares for every 5 held.
Application amount: Application amount = number of shares × price per share; In book building, bids are valid within the price band. The final cut-off price is the issue price.
Funds raised in a fresh issue: Funds raised = fresh shares issued × issue price; OFS shares are excluded from this.

How to solve Primary Market and IPO Process questions

Most primary market questions are definition or comparison questions. Use this order to avoid trap options.

1Read the question and mark the key detail: listed or unlisted company, public or select group, existing shareholders or everyone.
2Decide the route. Unlisted and public means IPO. Listed and public means FPO. Existing shareholders only and pays means rights. Existing shareholders and free means bonus. Select group only means private placement.
3Check who gets the money. Fresh issue, rights and private placement bring money to the company. OFS pays the selling shareholders. Bonus brings none.
4If pricing is mentioned, separate fixed price from book building and the price band from the final issue price.
5If a calculation is asked, write the ratio or the numbers first, then multiply carefully.
6Eliminate options that use absolute words or mix up two routes, then choose the remaining one.

Quickest way: Two-question filter

When to use it: Use it for any route-identification or comparison question when time is short.

Ask: is the company already listed? Yes points to FPO, rights or bonus. No points to IPO.
Ask: does the company receive money? Yes points to fresh issue or rights. No points to bonus or OFS.
Match the remaining route and check the option wording for traps.

Common mistakes in Primary Market and IPO Process

Treating an FPO as the first offer to the public
The word public makes students think of any public offer.
Fix: Remember that FPO means follow-on. The company is already listed.
Saying a bonus issue raises funds
Both rights and bonus add shares for existing shareholders.
Fix: Bonus is free and comes from reserves. Rights needs payment.
Assuming all IPO proceeds go to the company
Students ignore that an IPO can include an OFS.
Fix: Split the offer into fresh issue and OFS. Only the fresh part benefits the company.
Confusing price band with issue price
Both are mentioned in book-built issues.
Fix: The band is the range for bidding. The issue price is the single price finally decided after bids.
Calling a private placement a public issue
Both raise money from investors.
Fix: A private placement targets a select group, not the general public.
Thinking ASBA transfers money immediately
Students link applying with paying.
Fix: ASBA only blocks the amount in your account. It is debited only on allotment.

Worked examples

Example 1

A shareholder holds 500 shares. The company announces a rights issue of 2 new shares for every 5 held at ₹150 per share. How many shares is the shareholder entitled to and how much must be paid to subscribe fully?

Show the solution

Ratio is 2 new for 5 held.
Entitlement = 500 × 2 ÷ 5 = 200 shares.
Amount payable = 200 × ₹150 = ₹30,000.

Answer: 200 shares, with ₹30,000 payable.

Example 2

Which of the following is correct? (A) An FPO is made by an unlisted company (B) A bonus issue brings fresh funds to the company (C) In an offer for sale, proceeds go to the selling shareholders (D) A private placement is offered to the general public

Show the solution

Option A is wrong, because an FPO is by an already listed company.
Option B is wrong, because bonus shares are issued free out of reserves and no money is raised.
Option C is right, because in an OFS existing holders sell, so they receive the money.
Option D is wrong, because a private placement is to a select group.

Answer: Option C

Exam tips

Expect comparison questions: IPO vs FPO, rights vs bonus, fresh issue vs OFS. Build a one-line difference for each.
Watch for the words listed, existing shareholders and fresh funds. They usually decide the answer.
For XXI-A there is negative marking of 10% of each question's marks, so eliminate wrong options first and guess only when two are left.
Do rights ratio sums slowly: multiply holding by new shares and divide by old shares.

Practice questions from Investing in Stocks (NISM XXI-A)

Primary Market and IPO Process: frequently asked questions

What is the difference between IPO and FPO?

An IPO is the first public offer by an unlisted company, after which it gets listed. An FPO is a later public offer by a company that is already listed.

What is the difference between rights issue and bonus issue?

A rights issue offers new shares to existing shareholders for a price, so the company raises money. A bonus issue gives free shares from reserves, so no money is raised.

What is ASBA in an IPO?

ASBA blocks the application amount in your bank account until allotment. If you get shares, the amount is debited. Otherwise the block is released.

Do PMS distributor exam questions cover the primary market?

Yes, as part of the Investing in Stocks chapter. Expect definitions and comparisons of issue routes rather than long calculations.