When a company needs capital to grow, expand, or improve its financial health, one of the most transparent ways to raise funds is through the primary market. This is where securities are issued for the first time, giving investors a chance to participate directly in a company’s growth. Instruments like Initial Public Offerings (IPOs), Follow-on Public Offerings (FPOs), and bond issuances help raise fresh capital while offering early investment opportunities. In the bond market in India, the primary market is essential for fixed-income investing. Understanding how these offerings work helps investors assess risks, returns, and timelines more effectively.

What is the Primary Market?

The primary marketis where new securities, such as equities or bonds, are initially issued and sold for the first time. The issuer, typically a company or a government entity, raises capital directly from investors. Unlike the secondary market, where existing securities are traded among investors, the primary market facilitates the initial transfer of funds from investors to issuers, playing a crucial role in capital formation and economic growth.

Key participants in this market are:

1. Issuer: The company or government issuing the bond, share, or debenture (a type of loan certificate).
2. Underwriter: Usually an investment bank that helps price and sell the issue, and may buy any shares not sold.
3. Investor: Anyone who buys these new securities, like you or large institutions.
4. Regulator: In India, it’s the Securities and Exchange Board of India (SEBI) that ensures everything is fair and transparent.

Types of Primary Market Issues

When companies need funds, they can raise capital in several ways, depending on their goals and investor types. Here are some common methods businesses use to issue shares or raise money from the primary markets:

1. IPO (Initial Public Offering)

A private company becomes public by selling shares for the first time on the stock market.

For example, a software firm decides it needs funding to build a new office. It sells shares through an IPO so investors can buy a stake, and the firm gets the cash.

2. FPO (Follow-on Public Offering)

A company already listed on the stock market issues more shares.

3. Private Placement

Shares or bonds are sold to a small group, like banks, institutional investors, or high-net-worth individuals. These deals are faster and less formal than public ones.

4. Preferential Issue

Shares are offered to a select group, sometimes existing investors, before they’re made available to the public.

5. Qualified Institutional Placement (QIP)

Large financial institutions buy fresh shares from companies already listed. No retail investors involved here.

6. Rights and Bonus Issue

• Rights Issue: Existing shareholders have the first opportunity to purchase additional shares at a predetermined price.
• Bonus Issue: Extra shares given to existing shareholders for free.

How the Primary Market Works?

Understanding how the primary market functions helps investors make more informed decisions. Here’s a step-by-step look at the process:

1.    Setting the Price: There are two main methods used to determine the price of securities:

• Fixed Price Issue: The company sets a fixed price for the securities before the issue opens. Investors know the exact price they’ll be paying.
• Book Building Method: Price range is fixed, and investors place bids. The final price is determined by demand.

2.     The Issuance Process

• Draft Offer Document: The company files a draft prospectus with SEBI, outlining details about the business, financials, and purpose of the issue.
• Public Comments: This draft is made available for public feedback. Based on suggestions and regulatory input, the document has been revised.
• Final Offer Document/Prospectus: The updated document includes the final issue price, project details, and key financial information.
• Issue Period: The issue typically remains open for subscription for 3 to 10 working days. For infrastructure companies, this period may be longer.
• Allotment of Securities: If the issue is oversubscribed, allotment is done on a proportional basis. Retail investors may get partial allotment based on demand.
• Listing on the Stock Exchange: Once allotment is completed, the securities must be listed on the stock exchange.

Why Invest in the Primary Market?

• New opportunities: You can buy shares or bonds at the original issue price.
• Support growth: Your money helps companies expand or governments build projects.
• Clarity and fairness: SEBI ensures full disclosure, so you can make informed choices.

How to Invest in IPOs/FPOs?

Follow a few simple steps to invest in an IPO or FPO:

1. Open a Demat Account: Required to hold shares in digital form.
2. Ensure you have a PAN Card and a Bank Account: Both are mandatory for applying.
3. Apply via ASBA: It blocks the amount in your bank account. The money stays with you until shares are allotted.
4. Book-Building or Fixed Price: For book-building issues, choose “cut-off” if you’re unsure about the price.
5. Check Allotment: If you get shares, they will reflect in your Demat account.

How to Buy Bonds in India?

Bonds are a popular investment option for those seeking stable returns with lower risk. Here’s how you can invest in them:

1. In the Primary Market: Bonds are issued by the government or companies. You can apply when these issues are announced, usually through banks or authorised brokers.
   
   
2. Through Platforms: You can use online services like Bondbazaar not only to buy but also to sell bonds.
3. Being Aware of Documents Needed: You’ll need your PAN card, KYC documents, and bank account details to invest.
   
   
4. Understanding the Terms: Bonds have fixed interest and a fixed maturity. Interest may be taxable or tax-free depending on the issue.

By understanding the process and requirements, you can confidently make informed decisions on how to buy bonds in India.

Functions of the Primary Market

The primary market plays a crucial role in a country’s economic development by enabling capital formation.

• Helps companies and governments raise capital.
• Encourages public investment and mobilises savings.
• Offers transparent pricing, reducing fraud.

By channeling funds directly to issuers, the primary market supports business growth and infrastructure development.

Main Risks for Investors

While investing in the primary market can be rewarding, it’s important to be aware of the potential risks.

• Market Volatility: New issues may underperform.
• Incomplete Information: Always read the prospectus carefully.
• Lock-in Period: Some issues require you to hold for a set time, like 5 years.

Understanding these risks allows investors to make more informed and cautious decisions.

Conclusion

Investing in India’s primary market opens doors to fresh opportunities, be it through IPOs, FPOs, or bonds in the bond market in India. Understanding key processes, like ASBA, book building, and fixed-price issues, can help you invest wisely. Bonds work differently as you lend money to a company or government in exchange for regular interest and repayment at maturity. As with any investment, there are risks, such as price fluctuations, oversubscription, or lock-in periods. To invest with confidence, review the documents carefully, understand the terms, and explore reliable platforms to learn how to buy bonds effectively.

FAQs

1. What is the difference between primary and secondary markets?

Primary market involves fresh issuance of securities by the company. Secondary market is where these securities are traded between investors.

2. Can I buy bonds in the primary market through Bondbazaar?

Yes, Bondbazaar offers access to new bond issues from government and corporates with zero brokerage and real-time execution.

3. What documents are required to invest in primary market bonds?

You’ll need PAN, a Demat account, a bank account, and KYC-compliant documents (ID/address proof) to apply.