NISM Series X-A · Chapter 6: Securities Market Segments

L1 · Foundation

Foundation — The primary market: functions, issue types, issuers, investors and pricing

What the primary market is and the eight functions it performs, the five types of issue, the seven types of issuer, the fourteen categories of investor, IPO versus FPO and fresh issue versus offer for sale, and fixed price versus book built pricing with the worked bid table.

16 min read · Worth 3% of the paper · Written from pages 104–126 of the official NISM workbook · Updated 17 September 2026

6.1 Nature and definition of primary markets

"The primary market refers to the market where EQUITY OR DEBT FUNDS ARE RAISED BY COMPANIES FROM 'OUTSIDE' INVESTORS through an OFFER OF SECURITIES. 'OUTSIDE' INVESTORS refer to investors who are NOT ASSOCIATED WITH THE PROMOTERS."

"In primary market, INVESTORS PURCHASE THE SECURITY DIRECTLY FROM THE ISSUER. It is also called the 'NEW ISSUE MARKET' since these securities are ISSUED FOR THE FIRST TIME by the company."

"The process of expanding the ability of an issuer to raise capital from public investors, who may not have been associated with the initial stages of the business, is also known as 'GOING PUBLIC.' The issuance of securities in the primary markets EXPANDS THE REACH OF AN ISSUER and MAKES LONG-TERM CAPITAL AVAILABLE from a LARGER NUMBER OF INVESTORS."

6.1.1 The functions of the primary market

a. Access to wider markets and investors — "Companies MOVE AWAY FROM KNOWN SOURCES OF FUNDING that may be RESTRICTIVE in terms of the AMOUNT available or the TERMS... They may be able to raise the funds they require at MUCH MORE COMPETITIVE TERMS."

b. Transparent pricing mechanism — "Securities are issued for public subscription, at a price determined by the DEMAND AND SUPPLY CONDITIONS in the market and the PERCEIVED FUNDAMENTAL STRENGTHS of the issuer."

The chapter's illustration: "GOVERNMENT SECURITIES, which are issued by RBI on behalf of the government, are PRICED THROUGH AN AUCTION PROCESS. BANKS AND INSTITUTIONAL INVESTORS are the main buyers... and they BID THE RATES THEY ARE WILLING TO ACCEPT." And a candid note on equity: "Equity issuances are done through the BOOK BUILDING ROUTE, but the PRICE RANGE IS NOT WIDE. It is mostly an ASSESSMENT BETWEEN THE MERCHANT BANKER AND THE ISSUER."

c. Ownership diversification — "As new subscribers come in, the STAKES OF EXISTING SHAREHOLDERS REDUCE and the ownership becomes MORE BROAD-BASED. This enables the SEPARATION OF OWNERSHIP AND MANAGEMENT, where PROFESSIONAL MANAGERS are brought in... The presence of INDEPENDENT DIRECTORS on the boards, REPRESENTING PUBLIC SHAREHOLDERS, ENHANCES THE GOVERNANCE STANDARDS."

d. Better disclosures — "A business that seeks to raise capital from new investors... HAS TO MEET HIGHER STANDARDS OF DISCLOSURE AND TRANSPARENCY. Regulations that govern primary markets PRESCRIBE THE NATURE AND PERIODICITY of disclosures."

e. Evaluation by investors — "forms ANOTHER LAYER OF SCRUTINY of the operations and performance of the company, APART FROM ITS AUDITORS AND REGULATORS. Publicly disclosed financial statements, reports, prospectus... come up for scrutiny and discussion by ANALYSTS, RESEARCHERS, ACTIVISTS, AND MEDIA."

f. Exit for early investors — "'EARLY INVESTORS' who TAKE A RISK by investing in a company in the INITIAL STAGES before it has established a record of performance and profitability are thus able to MAKE A PROFIT... A VIBRANT PRIMARY MARKET IS THUS AN INCENTIVE for such investors."

g. Liquidity for securities — "When capital is held by a few inside investors, the securities held are NOT LIQUID... IT IS MANDATORY TO LIST A PUBLIC ISSUE OF SECURITIES ON THE STOCK EXCHANGE. This OPENS UP THE SECONDARY MARKET."

h. Regulatory supervision — "The ISSUE PROCESS, INTERMEDIARIES INVOLVED, the DISCLOSURE NORMS, and EVERY STEP of the primary issuance process is SUBJECT TO REGULATORY PROVISIONS AND SUPERVISION." But note the limit: "While there is NO ASSURANCE OF RETURN, RISK, SAFETY OR SECURITY, regulatory processes are designed to ensure that FAIR PROCEDURES are used, ADEQUATE AND ACCURATE INFORMATION is provided, and RIGHTS OF ALL PARTIES is well defined, balanced and protected."

6.1.2 Types of issues

"All primary market issues NEED NOT BE PUBLIC ISSUES."

Type	Definition
a. Public issue	"Securities are issued to the MEMBERS OF THE PUBLIC, and ANYONE ELIGIBLE TO INVEST CAN PARTICIPATE. Means an IPO or an FPO
IPO	"an offer of specified securities by an UNLISTED ISSUER to the public for subscription, and INCLUDES AN OFFER FOR SALE by any existing holder"
FPO	"an offer of specified securities by a LISTED ISSUER to the public for subscription, and includes an offer for sale"
b. Private placement	"issued to a SELECT SET OF INVESTORS who can bid and purchase... primarily a WHOLESALE issue of securities to INSTITUTIONAL INVESTORS BY AN UNLISTED COMPANY"
c. Preferential issue	"an issue by a LISTED ISSUER to ANY SELECT PERSON OR GROUP on a PRIVATE PLACEMENT BASIS... DOES NOT INCLUDE an offer through ESOP, employee stock purchase scheme, SWEAT EQUITY shares, DEPOSITORY RECEIPTS issued in a country outside India or FOREIGN SECURITIES"
d. Qualified Institutions Placement	"issue of eligible securities by a LISTED ISSUER to QUALIFIED INSTITUTIONAL BUYERS on a PRIVATE PLACEMENT BASIS and includes an offer for sale by the promoters and/or promoter group. QIBs include MUTUAL FUNDS, FOREIGN PORTFOLIO INVESTORS, INSURANCE COMPANIES"
e. Rights and bonus issues	"issued to EXISTING INVESTORS as on a SPECIFIC CUT-OFF DATE, enabling them to BUY MORE SECURITIES AT A SPECIFIC PRICE (RIGHTS) or get an allotment of additional shares WITHOUT ANY CONSIDERATION (BONUS)"

6.1.3 Types of issuers

"As per SEBI (ICDR) REGULATIONS, 2018, an ISSUER IS A COMPANY OR BODY CORPORATE AUTHORIZED TO ISSUE SECURITIES."

Issuer	What it issues
a. Central, State and Local Governments	"TREASURY BILLS (original maturities of less than one year) or GOVERNMENT BONDS / DATED SECURITIES (original maturity of one year or more). The CENTRAL Government issues BOTH, while the STATE Governments issue ONLY BONDS, called STATE GOVERNMENT SECURITIES (SGSs). G-Secs carry NO RISK OF DEFAULT and are called RISK-FREE GILT-EDGED INSTRUMENTS. The central government ALONE issues treasury bills for 91 DAYS, 182 DAYS AND 364 DAYS"
b. Public Sector Units	"companies registered under the COMPANIES ACT, in which the GOVERNMENT IS THE MAJORITY SHAREHOLDER. An issue where "the government offers a portion of the shares held by them to the public" is called DISINVESTMENT. Example: POWER GRID CORPORATION, DECEMBER 2013, 13% FRESH EQUITY plus a 4% STAKE SALE by the government. PSUs also issue bonds, some with TAX BENEFITS — e.g. NHAI tax-free bonds, JANUARY 2014. For saving long-term capital gains it is SECTION 54EC; tax-free bonds have had NO FRESH PRIMARY ISSUANCE FOR APPROX. 8 YEARS and are available in the SECONDARY market"
c. Private Sector Companies	"ORDINARY EQUITY SHARES, PREFERENCE SHARES AND CONVERTIBLE INSTRUMENTS. CORPORATE BONDS for LONG-TERM debt capital while COMMERCIAL PAPERS for LESS THAN ONE YEAR"
d. Banks, FIs and NBFCs	"equity shares, preference shares, bonds, convertible bonds, commercial paper, certificates of deposits and SECURITIZED PAPER. Deposit taking institutions such as BANKS have access to LOW-COST FUNDS and therefore are NOT DEPENDENT TOO MUCH on the securities markets"
e. Mutual Funds	"a NEW FUND OFFER (NFO) of UNITS... raised for a specific period (CLOSED-END) or for PERPETUITY with investors given the option to EXIT AT ANY TIME"
f. REITs and InvITs	"may issue units in a public offer or private placement. REIT invest in REAL ESTATE while InvIT do so in INFRASTRUCTURE projects. Managed by MERCHANT BANKERS, units LISTED on a stock exchange. Note: "there is a HIGHER MINIMUM AMOUNT FOR INVESTMENT even when the units are offered in a public offer AS COMPARED TO A NORMAL IPO"
g. Alternative Investment Funds	"PRIVATELY POOLED INVESTMENTS. They raise money through a PRIVATE PLACEMENT. AN AIF CANNOT MAKE AN INVITATION TO THE PUBLIC AT LARGE. The AIF may also undertake to RAISE DEBT THROUGH BORROWINGS"

6.1.4 Types of investors

"Resident individuals · Hindu Undivided Family (HUF) · Minors through guardians · Registered societies and clubs · Non-resident Indians (NRI) · Persons of Indian Origin (PIO) · Banks · Financial institutions · Association of persons · Companies · Partnership firms · Trusts · Foreign portfolio investors (FPIs) · Limited Liability Partnerships (LLP)."

6.1.5 Types of public issue of equity shares

Initial Public Offer

"The FIRST public offer of shares made by a company... the shares become WIDELY HELD and there is a CHANGE IN THE SHAREHOLDING PATTERN."

	Fresh Issue of Shares	Offer for Sale
Who issues	"NEW SHARES are issued by the COMPANY to public investors"	"EXISTING SHAREHOLDERS such as promoters or financial institutions offer a PART OF THEIR HOLDING"
Share capital	"The ISSUED SHARE CAPITAL of the company INCREASES"	"The share capital DOES NOT CHANGE since the company is NOT MAKING A NEW ISSUE"
Who gets the money	The company	"The proceeds go to the EXISTING SHAREHOLDERS who are selling the shares and NOT TO THE COMPANY"
Effect on existing holders	"percentage holding of existing shareholders will COME DOWN due to the issuance of new shares"	"The HOLDING of the existing shareholders will REDUCE"

"The DISINVESTMENT of shares by the government in PSUs is an EXAMPLE OF AN OFFER FOR SALE." And: "An IPO may also be a COMBINATION of an offer for sale and a fresh issue."

Further Public Offer

"made by an issuer that HAS ALREADY MADE AN IPO IN THE PAST." Reasons: "when a company wants ADDITIONAL CAPITAL FOR GROWTH or to REDO ITS CAPITAL STRUCTURE BY RETIRING DEBT"; or through an offer for sale, which "usually happens when it is necessary to INCREASE THE PUBLIC SHAREHOLDING to meet the requirements laid down in the LISTING AGREEMENT", or when "promoters may DILUTE THEIR HOLDINGS after the LOCK-IN imposed at the time of the IPO IS OVER."

6.1.6 Pricing a public issue

Fixed price issue

"the company IN CONSULTATION WITH THE LEAD MANAGER (who is the MERCHANT BANKER IN-CHARGE of the issue) would DECIDE ON THE PRICE. The company JUSTIFIES THE PRICE based on the EXPECTED PERFORMANCE and the PRICE OF SHARES OF COMPARABLE COMPANIES. This information is made available WHEN THE ISSUE IS ANNOUNCED so that investors KNOW THE PRICE AT THE TIME OF MAKING THE APPLICATION."

Book built issue

"The objective is to IDENTIFY THE PRICE THAT THE MARKET IS WILLING TO PAY."

"specify either a FLOOR PRICE (BASE PRICE) or a PRICE BAND (price range starting from floor price to 20% ABOVE IT)"
"investors will put in bid applications SPECIFYING THE PRICE AND THE NUMBER OF SECURITIES"
"RETAIL INVESTORS CAN REVISE THE BIDS in the period when the issue is open"
"the issuer, in consultation with the BOOK RUNNING LEAD MANAGER, will decide on the CUT-OFF PRICE which is the PRICE AT WHICH THE ISSUE GETS SUBSCRIBED. ALL ALLOTTEES WHO BID AT OR ABOVE THE CUT-OFF PRICE ARE SUCCESSFUL BIDDERS"

The worked example — 5,000 shares within a band of Rs 120 to Rs 144:

Price	No. of shares	Total demand
Rs 144	1,000 (A)	1,000
Rs 140	1,500 (B)	2,500 (A+B)
Rs 135	2,500 (C)	5,000 (A+B+C)
Rs 130	1,000 (D)	6,000 (A+B+C+D)
Rs 120	500 (E)	6,500 (A+B+C+D+E)

"The offer of 5,000 shares is FILLED UP AT THE CUT-OFF PRICE OF RS 135. All investors who bid at THIS PRICE AND HIGHER are ELIGIBLE FOR ALLOTMENT in their respective categories."

"Book built issues may also have a clause which allows allotment to RETAIL INVESTORS at a price that is AT A DISCOUNT to the cut off price which CANNOT... BE AT A PRICE NOT LOWER THAN BY MORE THAN TEN PERCENT of the price at which shares are allotted to the other category of investors."

"RESERVATIONS to different categories of investors such as QUALIFIED INSTITUTIONAL BUYERS, MUTUAL FUNDS etc. are REQUIRED TO BE MADE during the course of the issue."

Think of it like this

Fresh issue fills the company's pocket; offer for sale fills the seller's

The single most examinable distinction in the chapter, and it turns on where the money goes. In a fresh issue "new shares are issued BY THE COMPANY" and "the ISSUED SHARE CAPITAL INCREASES." In an offer for sale "the proceeds go to the EXISTING SHAREHOLDERS who are selling the shares and NOT TO THE COMPANY", and "the share capital does NOT change." Government disinvestment in PSUs is the chapter's own example of the second kind — the company gets nothing; the exchequer does.

Five thousand shares, five price levels, one cut-off

The book-building table is worth reading upward. Bids at Rs 144 cover 1,000 shares; add Rs 140 and you have 2,500; add Rs 135 and you reach exactly 5,000 — the size of the offer. That is the cut-off. Everyone who bid at or above Rs 135 is a successful bidder; everyone below gets a refund. The logic is an auction run in reverse: the issuer walks the price down from the top until the book is full, and stops at the first level where it is.

Bidding at the cut-off guarantees your application is accepted

A practical point retail investors routinely miss. "Bidding at the cut-off implies that the price they would accept is the price DETERMINED BY THE BIDDING PROCESS", and the chapter states the consequence plainly: "Bidding at the cut-off ENSURES THAT THE INVESTOR'S APPLICATION IS ALWAYS ACCEPTED." You surrender the choice of price in return for certainty of participation. Naming a price below the eventual cut-off wins you nothing but a refund.

The regulator guarantees the process, not the outcome

Section 6.1.1 closes with a sentence every adviser should be able to repeat to a client: "WHILE THERE IS NO ASSURANCE OF RETURN, RISK, SAFETY OR SECURITY, regulatory processes are designed to ensure that FAIR PROCEDURES are used to raise capital, ADEQUATE AND ACCURATE INFORMATION is provided, and RIGHTS OF ALL PARTIES is well defined, balanced and protected." SEBI approval of a prospectus is not an endorsement of the share. It certifies disclosure, not merit.

Going public brings a permanent audience

Two of the eight primary market functions describe the same consequence from different angles. Better disclosures obliges the issuer to meet "higher standards of disclosure and transparency" on a prescribed periodicity. Evaluation by investors then adds "ANOTHER LAYER OF SCRUTINY... APART FROM ITS AUDITORS AND REGULATORS", from "ANALYSTS, RESEARCHERS, ACTIVISTS, AND MEDIA." A private company answers to its lenders and its auditor; a listed one answers to everyone, continuously.

A vibrant IPO market funds the start-ups that never reach it

The "exit for early investors" function explains a chain most people miss. Early investors "TAKE A RISK by investing in a company in the INITIAL STAGES before it has established a record of performance and profitability", and the primary market is where they finally realise that risk as profit. Hence: "A VIBRANT PRIMARY MARKET IS THUS AN INCENTIVE for such investors who invest in early-stage business." Without a credible exit at the end, the money at the beginning never arrives.

Only the Centre issues Treasury Bills

A small asymmetry the chapter is precise about. The Central Government issues both Treasury Bills (under one year) and dated securities; the State Governments issue only bonds, called State Government Securities. And "the central government ALONE issues treasury bills", in three tenors: 91 days, 182 days and 364 days. Both are "risk-free gilt-edged instruments" carrying "no risk of default" — but only one of them comes in a 91-day version.

Preferential issue and QIP look alike and are not

Both are private placements by a listed issuer, which is why they are confused. The difference is who may be offered the securities. A preferential issue goes "to ANY SELECT PERSON OR GROUP OF PERSONS" — which could include a promoter or a strategic partner. A qualified institutions placement goes only "to QUALIFIED INSTITUTIONAL BUYERS" such as mutual funds, FPIs and insurers. And note the carve-outs from preferential issue: ESOPs, employee stock purchase schemes, sweat equity, overseas depository receipts and foreign securities are all excluded.

Key terms in this chapter

ASBA: Application Supported by Blocked Amount, the only permitted route for public issue applications. It authorises the bank to block the application money and release funds only on allotment.
Base Minimum Capital (BMC): The deposit given by exchange members against which no exposure for trades is allowed. Additional capital is brought in over and above it to cover margin payments.
Bidding at the cut-off: Accepting whatever price the bidding process determines, which ensures the investor's application is always accepted.
Bonus issue: Shares issued to existing shareholders without any consideration, out of free reserves built from genuine profits. Barred if the company has defaulted on debt securities or fixed deposits.
Book built issue: An issue where a floor price or a price band up to 20 per cent above the floor is specified and investors bid, with the cut-off price determined by the issuer and book running lead manager.
Circuit breaker: An index-based market-wide trading halt at 10, 15 and 20 per cent movement either way, triggered by whichever of the Sensex or Nifty 50 is breached earlier, halting all equity and equity derivative markets nationwide.
Core Settlement Guarantee Fund: The fund guaranteeing settlement in the cash, equity derivatives and currency derivatives segments, used to fund a defaulting member's obligations without affecting normal settlement.
Cut-off price: The price at which the issue gets subscribed. All allottees who bid at or above it are successful bidders, and all pay the cut-off price.
Debenture trustee: A bank or financial institution registered with SEBI, appointed to oversee investor interests in a debt issue and, for secured debentures, to ensure the charged property remains adequate at all times.
Dilution of holdings: The reduction in existing shareholders' proportionate holding when a company issues fresh shares. A rights issue prevents it by offering the new shares to existing shareholders first.
Fixed price issue: An issue where the company, with the lead manager, decides the price in advance, justified by expected performance and comparable companies, and disclosed when the issue is announced.
Fresh issue of shares: New shares issued by the company to public investors, increasing the issued share capital and reducing the percentage holding of existing shareholders.
Further Public Offer (FPO): An offer of specified securities by a listed issuer to the public for subscription, which may also include an offer for sale.
Gilt-edged instruments: Government securities, which carry no risk of default. The Central Government issues both Treasury Bills of 91, 182 and 364 days and dated securities; States issue only bonds.
Going public: The process of expanding an issuer's ability to raise capital from public investors who may not have been associated with the early stages of the business.
Information signalling: The function by which market prices act as a continuous monitor of issuing companies, forcing them to improve profitability and performance.
Initial Public Offer (IPO): An offer of specified securities by an unlisted issuer to the public for subscription, which may include an offer for sale by an existing holder.
Margin: Funds deposited with the clearing corporation to cover the risk of non-payment of dues or non-delivery of securities. Brokers collect it from clients at order placement; exchanges collect it from brokers at execution.
Market capitalisation: The number of shares outstanding multiplied by the market price per share. Used to classify stocks as large, mid or small cap, and as a measure of a market's size through the market cap to GDP ratio.
Market index: A tracker of market movement built from a representative sample of liquid shares, usually weighted by market capitalisation and reviewed periodically. Used for reporting, as a leading indicator and as a performance benchmark.
Medium for corporate control: The function by which underperforming companies become undervalued takeover targets, so that even the possibility of a takeover promotes better governance.
Novation: The process by which the clearing corporation becomes the legal counterparty to all trades, eliminating counterparty risk and settling even if a trading member defaults.
Offer for sale: Existing shareholders selling part of their holding to the public. The share capital does not change and the proceeds go to the selling shareholders, not the company. Government disinvestment is an example.
Preferential issue: An issue by a listed issuer to any select person or group on a private placement basis, excluding ESOPs, employee stock purchase schemes, sweat equity, overseas depository receipts and foreign securities.
Price band: A daily limit on individual security prices: 2, 5 or 10 per cent as specified, none for scrips with derivatives available (which instead get a 10 per cent operating range), and 20 per cent for all remaining scrips.
Price discovery: The secondary market function by which the collective opinions of investors, reflected in real time trading data, establish the market price of a security.
Primary market: The market where equity or debt funds are raised by companies from outside investors through an offer of securities. Also called the new issue market, since securities are issued for the first time.
Private placement: Issue of securities to a select set of investors who can bid and purchase them, primarily a wholesale issue to institutional investors by an unlisted company.
Prospectus: The document giving all information on the issuer and the proposed issue. A draft is first filed with SEBI, and after modifications the final version is filed with the Registrar of Companies, SEBI and the stock exchange.
Qualified Institutions Placement (QIP): Issue of eligible securities by a listed issuer to qualified institutional buyers on a private placement basis, which may include an offer for sale by promoters.
Record date: The date, along with the book closure period, on which an investor's name must appear on the records to be an eligible shareholder entitled to a corporate action.
Reverse book building: The process through which a company buys back shares in a voluntary delisting. Compulsory delisting, by contrast, follows non-compliance with regulations and the listing agreement.
Rights entitlement (RE): The tradable entitlement in a rights issue. It has a separate ISIN, is credited to the demat account, and can be sold on the exchange by a shareholder who does not wish to subscribe.
Secondary market: The market where securities once issued are bought and sold between investors. Transactions bring no additional capital to the issuer.
Share buyback: A company buying back its listed shares out of reserves and surplus. The shares are extinguished, share capital reduces, and EPS rises. Barred if the company has defaulted on various obligations.
Stock split: A reduction of face value in a defined ratio, increasing the number of shares. Share capital and the value of a holding are unchanged; liquidity improves.
Trade-to-trade segment: A segment to which an exchange may shift a volatile scrip, forcing members to give or take delivery and so eliminating intra-day closing volatility.
Turnover ratio: The ratio of turnover in rupees to market capitalisation for the market as a whole. The higher the liquidity, the higher the turnover ratio.

Check you have understood it

The L1 test for this chapter has 8 questions. Score 60% to unlock L2 Application (worked numericals and scenarios) and then L3 Exam-Ready (NISM-style traps, timed, with this paper's real marking). Tests, the higher levels and full mock exams need a free account so we can track your progress.

Create a free account

Original explanatory writing based on the official NISM workbook for Series X-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

Something look wrong? Report it