In recent times, IPOs on Indian stock exchanges have become increasingly common, serving as a important means for businesses to raise capital and reflecting a India’s economic growth.
When a company decides to issue shares, the offer is often set at a premium price. This premium signifies that the current market valuation of the company exceeds the face value of the shares.
In this article we will understand the concept of Face Value or Nominal Value of shares in an IPO
Face Value in IPO: Understanding the Basics
Face Value is the nominal or par value of a security as stated on the share certificate.
Imagine an investor alloted 100 shares of XYZ Ltd. during its IPO at a face value of Rs.10 per share. This implies that the investor will receive Rs.1000 when the company’s share begins trading on the stock exchange.
This works as per the theory, but in practical the shares wont trade at Face Value.
As explained earlier, investors express a willingness to pay a price higher than the face value of the shares because they perceive the company’s actual worth in the market to be greater.
The term “premium” in this context refers to the additional amount investors are willing to pay beyond the face value of the shares. This extra payment is indicative of the market’s confidence in the company’s prospects, performance, and overall financial health.
The formula for calculating the issue price involves adding this premium to the face value of the shares. So, if FV represents the face value and premium denotes the extra amount paid by investors, the issue price (IP) can be expressed as:
IP=FV+premium
The face value is the nominal or the nominal value of a security stated by the issuer. While the market price of a stock may fluctuate based on supply and demand, the face value remains constant.
Also Read : What is Oversubscription in an IPO and how it affects listing price
Importance and Utility of Face Value
Lets understand how the Face Value is used and how it is affected during important corporate actions.
1. Stock Splits:
During a stock split, the number of shares outstanding increases, and the price per share decreases proportionally. The face value, however, remains the same. The split ratio determines how many new shares an investor receives for each old share.
For example, in a 2-for-1 stock split, each existing share is divided into two new shares. If a company’s stock had a face value of ₹10 per share before the split, it would still have a face value of ₹10 per share after the split, but there would be twice as many shares in circulation, and the market price per share would be halved.
2. Dividend Calculations:
Dividends are typically declared as a percentage of the face value of a share. The formula for calculating dividends is:
Dividend per share=(Face value per share/Dividend per share)×100
Here:
- Dividend per share is the total dividend paid by the company divided by the total number of outstanding shares.
- Face value per share is the nominal value of the share as specified in the company’s memorandum of association.
For example, if a company declares a dividend of 10% on a face value of ₹10 per share, the dividend per share would be (10%×₹10)=₹1 per share.
3. Comparative Analysis of Companies
Face value provides a fundamental reference point for evaluating different stocks. Understanding the face value helps investors compare companies.
It’s a nominal value assigned to each share, aiding in assessments of stock performance. Investors can gauge if a stock is trading at a premium or discount concerning its face value.
This comparison is crucial for making informed investment decisions, as it contributes to a broader understanding of a company’s financial structure
4. Stock Issuance and Buybacks
Face value plays a role when a company decides to issue more shares or buy back existing ones. If a company issues new shares, they decide the number of shares to be issued based on the face value. Similarly, in a buyback, the company decides how many shares to buyback.
Face Value vs. Issue Price
The face value denotes the price at which a company can sell its shares upon coming out with an IPO. Conversely, the issue price is the amount at which the company presents its shares to the public for the initial offering through an IPO.
| Concept | Description |
|---|---|
| Face Value | – Nominal value of a share determined by the issuing company. |
| – Typically a small amount (e.g., Rs. 1, Rs. 2, Rs. 10 per share) mentioned on the stock certificate. | |
| Issue Price | – Price at which the company offers its shares to the public during the IPO. |
| – Determined through a book-building process in the Indian market, based on investor bids within a price range. | |
| Premium | – The difference between the issue price and face value. |
| – Reflects the perceived value and market demand for the company’s shares. | |
| – Paid by investors during the IPO subscription. |
Using an example for clarification:
| Example | Amount (in Rs.) |
|---|---|
| Face Value of a share | Rs. 10 |
| Final Issue Price through book-building | Rs. 150 |
| Premium (Issue Price – Face Value) | Rs. 140 |
In this example, investors would pay Rs. 150 per share during the IPO, which includes a premium of Rs. 140 per share over the face value of Rs. 10.
Face Value vs. Market Price
| Aspect | Face Value (Indian Context) | Market Price (Indian Context) |
|---|---|---|
| Definition | Nominal value at which shares are issued by the company (e.g., Rs. 10 or Rs. 5 per share). | Current price at which a share is traded in the Indian stock market. |
| Regulatory Role | Regulated by SEBI; companies must issue shares with a face value. | SEBI regulates the IPO process, ensuring transparency in determining the issue price. |
| Determination in IPO | Faces regulatory guidelines; often set at a nominal amount and not the actual market value. | Determined through book-building or fixed price methods during the IPO, reflecting investor demand. |
| Investor Focus | Less relevant to investors during IPO; more of a regulatory requirement. | Primary focus during IPO; reflects investor perception of the company’s value and growth prospects. |
| Relation to Issue Price | May or may not be equal to the issue price; depends on regulatory and company considerations. | Issue price is crucial, representing the price at which shares are offered to the public during the IPO. |
How the Face Value in IPO is Calculated?
Here’s how the face value of a share in an IPO is calculated:
1. Determine the Total Face Value of the Issue:
The total face value is calculated by multiplying the face value per share by the total number of shares issued in the IPO. This information is typically provided in the IPO prospectus.
Total Face Value=Face Value per Share×Total Number of Shares Issued
2. Find Face Value per Share:
The face value per share is usually a small amount, such as Rs. 10 or Rs. 5. This is the nominal value of each share that the company attributes to its shares.
Example Calculation:
For example, if a company issues 1,00,000 shares in an IPO, each with a face value of Rs. 10, the total face value of the issue would be Rs.10×1,00,000=Rs.10,00,000
Can I Buy an IPO at Face Value?
Investors typically cannot buy shares at the face value. The face value is a nominal value assigned to the shares by the issuing company, and it is usually much lower than the actual market value.
During an IPO, shares are offered to the public at a price known as the offer price, which is determined by the company and its underwriters. This offer price is influenced by various factors such as the company’s financial health, growth potential, industry trends, and overall market conditions.
The offer price is generally higher than the face value, reflecting the perceived market value of the company.
Indian investors participating in an IPO need to subscribe to the shares at the offer price set by the company. The process often involves submitting bids within a specified price range, and the final allotment is based on various considerations, including demand from investors.
While employees or existing shareholders might sometimes get the chance to buy shares at a discounted price during an IPO, this is not the case for the general public. For most retail investors in India, participating in an IPO means paying the offer price determined through the IPO subscription process, and it is typically higher than the face value.
Also Read : What happens when IPO is Undersubscribed?
Final Thoughts
While face value might not be a critical factor for every investor, it remains an essential concept, especially for retail investors.
Understanding face value helps investors gauge the potential success of their investment.
FAQs: Face Value in IPO
Q1: What is Face Value in IPO?
Answer: Face Value in IPO is the nominal or original price at which a company issues new shares to investors during its Initial Public Offering (IPO).
Q2: How is Face Value Determined in an IPO?
Answer: The face value is determined based on an investment banker’s analysis of the company and its prospects before going public.
Q3: What Role Does Face Value Play in Stock Splits?
Answer: Face value plays a crucial role in stock splits as it helps determine the split ratio, ensuring a consistent nominal value even as the number of shares changes.
Q4: How Does Face Value Affect Dividend Calculations?
Answer: Face value influences dividend calculations, as companies often declare dividends as a percentage of the face value per share.
Q5: Is Face Value the Same as Issue Price in IPOs?
Answer: No, face value is the original price of a share, while issue price is what a company sets when offering its shares to the public for the first time during an IPO.
Q6: Can Face Value Change After an IPO?
Answer: No, face value remains constant after an IPO. It is the nominal value of the share and does not change with market fluctuations.
Q7: How Does Face Value Help in Comparative Analysis of Stocks?
Answer: Face value serves as a baseline for comparing stocks, helping investors assess if a stock is trading at a premium or discount relative to its original value.
Q8: Why is Face Value Important for Investors?
Answer: Face value is important for investors as it provides a foundational value for shares, influencing various aspects like dividend calculations, stock splits, and comparative analysis.
Q9: Can Investors Buy Shares at Face Value?
Answer: Generally, investors do not buy shares at face value in the market. Brokers typically avoid selling shares below the issue price set by the company during an IPO.
Q10: How Does Face Value Contribute to the Company’s Capital Structure?
Answer: Face value plays a role in determining a company’s capital structure by providing the nominal value per share, which is used in financial calculations such as dividends and earnings per share.
Check Out Below Articles Related to IPO:
- How to Apply for an IPO Through UPI – In 7 Easy Steps
- What is ASBA in IPO? Benefits & Application Process
- 7 Biggest IPOs of India of All Time
- What Happens if IPO is Underscribed? – Benefits and Drawbacks
- What is a Deemed Prospectus in IPO?
- What is Roadshow in IPO and What is its Purpose?
- Syndicate Member: Role in IPO, Types and Syndication Risk
- What is Lock-In Period in IPO? Benefits and Drawbacks
- All About Non-Convertible Debentures (NCDs)
- Greenshoe Option in IPO – Meaning, Importance, Example
- Who are Qualified Institutional Buyers (QIBs)?
- What is Draft Red Herring Prospectus (DRHP) in IPO?
- What Are Pre-IPO Stocks (Unlisted Shares)? Benefits and Risks
- 7 Tips for Investing in IPOs to Beginners and Investors
- What is Red Herring Prospectus (RHP)? Why is it Important in IPO?