What is Face Value in IPO?

In recent years, the number of corporations releasing their shares to the public through an initial public offering (IPO) has increased. Now, before you invest in an IPO, you need to be informed of the many phrases related with it. You should be familiar with the face value of an IPO. Many of you may ask what is face value in IPO is, let's take a deeper look at the definition and importance of the term "face value of an IPO."

What is an IPO?

An IPO is a private firm's attempt to raise capital through stock markets, typically using the book-building process. This method determines the issue price by measuring demand, announcing a price band, and having investors bid for specific shares at different price points. The ultimate issue price is determined by the number of shares bid at each price point. Subscriber data is updated daily.

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Understanding Face Value in IPO with Example

The floor price, ceiling price, and issue price are significant phrases, but why should firms disclose the face value of their shares? The face value, also known as the par value, represents the notional value of the shares. The face value might be Rs 1, Rs 2, Rs 5, or even Rs 100. The issue price, also known as the price band, is the face value of the shares plus any additional premium that the firm chooses to charge potential subscribers.

The issue price = face value + premium

Rather than randomly, the premium is determined by the company's performance criteria, such as sales, profit, and growth. IPOs have put the price band close to the face value of the shares, indicating that the business sought a low premium. 

After listing, a company's stock price fluctuates in response to market conditions and its performance. The share price varies with the market, but the face value does not, which is why firms use the face value to announce share splits. For example, consider business XYZ with a share price of Rs 3000 and a face value of Rs 5. To enhance affordability for retail investors, the company decides to split the shares into three. Post-split, the face value becomes Rs 1, and the share price adjusts to Rs 1000.

Likewise, in dividend declarations, if a company has a face value of Rs 1 and a share price of Rs 150, a 100% face value dividend would translate to a payout of Rs 2 per share.

Importance of Face Value

The face value of a share is important in establishing the company's capital structure and the nominal value per share. A corporation with a face value of ₹10 per share and 10,000 outstanding shares has a nominal capital of ₹10,000,000. This nominal capital is used in various financial computations, including dividends and earnings per share, and it helps investors assess the company's financial structure. However, in practice, the face value of a share has minimal consequence on its market price, which is controlled by market demand, profit potential, and other variables.

Difference Between Face Value, Market Value, and Book Value

• As previously stated, the face value of a stock is a predetermined amount determined by the firm and implemented in conjunction with an initial public offering.
• The face value of a corporation is constant and unaffected by market changes.
• On the other hand, market value refers to a company's share price as it is currently traded on the stock market.
• Changes in government policy, macroeconomic conditions, and international events cause the current price of the share to fluctuate.
• Book value refers to the company's net worth as stated in its book. It is concerned with what all of its investors will get if the firm sells its assets and settles all of its liabilities and debts.

How are Shares Sold at Face Value?

When you buy a stock on the market, you pay a price less than its nominal or face value, known as a discount. This disparity is attributed to market factors such as supply and demand, investor mood, and the company's financial success. The face value is frequently less than the market value, signifying the notional value at which shares were initially authorised. Investors may still incur capital gains or losses based on the share's performance on the open market following purchase, therefore shares are not sold at face value.

How is Face Value Calculated in an IPO?

The face value reflects the per-share price, calculated by dividing the total number of shares to be issued by the total number of outstanding equity shares. For example, if a corporation has 1000 outstanding equity shares and intends to issue 100 additional shares, the face value per share will be 10 (1000/100).

In bonus or rights issues, the face value is determined proportionally by dividing the planned issue size by the number of outstanding securities. However, in an offer for sale (OFS) or repurchase, the face value and IPO price are also set using already outstanding securities.

According to SEBI requirements, shares in an IPO must be offered at the Nominal Price, and investors seldom acquire shares at face value since brokers often avoid selling shares below the issue price.

Conclusion

You can make better investment decisions with a firm grasp of terminology such as face value and premium. Many business activities announced by firms refer to the face value. However, going down in detail should not be an excuse to put off participating in the stock markets with a reliable stock market app to invest.