What is Face Value in an IPO?
The number of companies issuing their shares to the public through an IPO has risen in recent years. Now, before you proceed to invest in one, you need to be aware of the different terms associated with IPOs. Face value of an IPO is one such term that you should know. Let’s take a closer look at the meaning and significance of the term, face value of an IPO.
What is an IPO?
Before you take a look at what the face value in an IPO is, here’s a brief overview of what an IPO entails. Also known as an Initial Public Offering, an IPO is the process by which a company sells its shares to the general public for the first time. The funds that the company obtains via the sale of its shares can be used by it to meet its business requirements or growth goals. In addition to being a method to raise funds, companies frequently use IPOs as a means to provide their existing investors and promoters an exit route.
What is Face Value in an IPO?
Every company that is planning to issue its shares to the public via an IPO has to file a statutory document with the SEBI. This document, known as the Red Herring Prospectus, contains comprehensive information about the company and the details of the IPO, including the face value of the shares.
Now, the face value is the base value assigned to the shares of a company at the time of its incorporation. It is also referred to as the par value or the nominal value of the shares. Once assigned, the face value remains fixed and doesn’t change, irrespective of the performance of the company.
Generally, most companies tend to choose ₹10 as the face value of their shares, which means that the base value of each share of the company is ₹10. However, the company may choose to assign any number starting from ₹1 as the face value of its shares. Additionally, a company may also choose to increase the face value of its shares through stock consolidation or decrease the face value through a stock split. Doing so, however, will change the number of outstanding shares issued by the company.
Difference between Face Value and IPO price
Now that you understand what the face value in an IPO represents, let’s take a look at how it differs from the IPO price. While the face value is the value assigned to the shares at the time of incorporation, the IPO price is the price at which the shares are sold to the public. Usually, companies issuing shares to the public tend to set a price that’s higher than the face value of its shares as the IPO price. The difference between the face value and the IPO price is known as the premium. Here’s an example to help you understand the concept:
Let’s say that a company wants to issue shares to the public. While the face value of its shares is ₹10, it chooses to set an IPO price of around ₹600. In this case, the premium that the company demands from its investors is ₹590 (₹600 - ₹10). The premium is not an arbitrarily set number. A number of factors are considered when calculating the share premium, such as the company’s revenue, profits, industry standing and future growth potential, among others.
Difference between Face Value and Current Market Price
Similar to the face value and IPO price, there’s also a major difference between the face value and the current market price of a share. As you’ve seen, the face value of shares is fixed and doesn’t change over time, unless the company actively chooses to either increase or decrease it. The current market price, on the other hand, is constantly fluctuating based on the demand and supply of the company’s shares in the secondary stock market.
If you’re an investor evaluating a public issue, you don’t have to give much weightage to the face value in an IPO. Instead, the issue price and the premium demanded by the company are what you should look into. An IPO with a high issue price and premium is likely to be overvalued and may pose certain risks. On the other hand, a correctly valued or an undervalued IPO is likely to be a more favourable investment. Speaking of Initial Public Offerings, if you wish to invest in any of them, you would need a trading and demat account. m.Stock offers a unique trading and demat account that allows you to invest in IPOs without paying any brokerage. In addition to IPOs, m.Stock also enables you to invest in various other asset classes such as derivatives (F&O), currency, and mutual funds at absolutely zero brokerage for life. So, open an account today!