Primary Market & IPOs: Where Shares Are Born
Have you ever wondered how a private company becomes a public giant like Reliance or TCS? It starts here, in the Primary Market . This lesson demystifies the Initial Public Offering (IPO) process, helping you separate the hype from the real value.
What You Will Master Today
- The "New" Market: Why companies sell shares directly to you.
- IPO Process: From filing a DRHP to Ringing the Bell.
- Critical Concepts: Face Value, Price Band, Lot Size.
- Red Flags: Distinguishing between Fresh Issue vs Offer for Sale (OFS).
- How to Apply: The ASBA & UPI mechanism.
- Analysis: Reading beyond the Grey Market Premium (GMP).
1. What is the Primary Market?
The Primary Market is where securities (shares, bonds) are created and sold for the very first time. It is a direct transaction between the Company and the Investor .
Think of it like buying a new car from a Showroom . The money you pay goes directly to the manufacturer (Company). Once you drive it out, if you sell it to your friend, that's the Secondary Market (Used Car Market).
2. Why Do Companies Go Public (IPO)?
An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time. Why do they do it?
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💰Raising Capital: To expand business, build factories, or pay off heavy debts without paying interest to banks.
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🚪Exit for Early Investors: Founders and Venture Capitalists (VCs) who invested early want to sell their stake and book profits.
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🏆Visibility & Prestige: Being a listed company brings credibility and brand awareness.
3. The Life Cycle of an IPO
Going public isn't an overnight event. It takes months of preparation.
Important Terms to Know:
- DRHP (Draft Red Herring Prospectus): The document filed with SEBI containing all details about the company's business, risks, and financials. Always read the 'Risk Factors' section.
- Price Band: The range within which you can bid (e.g., ₹500 - ₹525). Always bid at the Cut-off Price (Higher end) to maximize chances of allotment.
- Lot Size: You cannot buy 1 share. You must buy a 'Lot' (e.g., 30 shares). Minimum investment is usually around ₹15,000.
4. The Most Critical Check: Fresh Issue vs OFS
Not all IPO money goes to the company. This is where many investors get tricked.
A. Fresh Issue
New shares are created.
Where money goes: To the Company's Bank Account .
Why good? Used for expansion, paying debt, or R&D. Shows growth potential.
B. Offer For Sale (OFS)
Existing shares are sold.
Where money goes: To Promoters/Investors' Pockets .
Why risky? Not a single rupee helps the company grow. It’s an exit for old investors.
Ideally, look for IPOs with a healthy mix of Fresh Issue. If it's 100% OFS, ask why the promoters are leaving.
5. How to Apply? (The ASBA Process)
Gone are the days of filling cheques. Today, we use ASBA (Application Supported by Blocked Amount) .
- You apply via your Bank App or Broker App (Zerodha, Groww).
- You enter your UPI ID.
- You get a mandate request on your UPI app. Approve it.
- Crucial: The money DOES NOT leave your account. It gets Blocked (Frozen).
- If you get allotment -> Money is debited.
- If you don't get allotment -> Money is unblocked (released).
6. The Grey Market Premium (GMP) Trap
The "Grey Market" is an unofficial, unregulated market where shares are traded before listing.
⚠️ Warning on GMP
A high GMP (e.g., +50%) suggests a strong listing gain, but it is NOT guaranteed . GMP can crash overnight if market sentiment turns bad. Never invest solely based on GMP; fundamentals matter more.
Frequently Asked Questions
What is the difference between Fresh Issue and Offer for Sale (OFS)? ▼
In a Fresh Issue , new shares are created, and the money goes to the company for growth. In an OFS , existing promoters sell their shares, and the money goes to them personally, not the company.
What is ASBA in IPO application? ▼
ASBA (Application Supported by Blocked Amount) is a process where the application money remains in your bank account but is 'blocked' or frozen. It is debited only if you are allotted shares.
Should I rely on Grey Market Premium (GMP)? ▼
GMP indicates unofficial demand. While it gives a hint about potential listing gains, it is unregulated and volatile. Never invest based solely on GMP ; always check the company's fundamentals.