What is Face Value in an IPO?

Investment in an IPO has been extremely popular among new investors entering into the stock market. In order to make good investment decisions and make consistent returns in the market, it is quintessential to know key terms associated with an IPO, such as “face value.” In an IPO, face value defines the original nominal value of each share. It is also known as par value.

In this blog, we will explain face value in an IPO, how shares are sold at face value, and how to calculate face value, which will help you clearly understand the importance of face value while investing in an IPO.

What is an IPO?

An Initial Public Offering, or IPO, is the process through which a private company offers its shares to the public for the first time. Companies go public for one or more of these reasons: to raise funds to further grow the business, pay off some debt, or for other strategic purposes. The investors attempt to become partial owners of the company and have a chance to profit if the company continues performing well.

The IPO shares are traded on the stock exchanges and, hence, accessible to the general public. To invest in an IPO, the investors would need a Demat account, which is an electronic account that lets investors hold and manage securities. For the companies, the process involves seeking regulatory approval and determining the issue price and the face value of shares with the help of investment banks.

What is the Face Value of an IPO?

Face value refers to the fixed base price assigned to every share of the company. Unlike the market price, which changes continuously after the IPO, face value is constant and reflects the base accounting value of a share.

For instance, if there are 1,00,000 shares outstanding and the equity share capital of the company is INR 10,00,000, then the face value of the shares is calculated by dividing the equity share capital by the total number of outstanding shares. The face value of shares in the above example is equal to INR 10.

Face value is different from the trading price of the share at a stock exchange. The trading price depends on market demand and the performance of a company; however, face value is a constant number used for accounting purposes and even for ascertaining dividends.

How Shares are Sold at Face Value?

In an IPO, the face value for the shares issued by the company is fixed at values such as INR 1, INR 10, etc. The price of the shares credited to the Demat account of the investors includes a premium over the face value, which is calculated by the underwriters based on the expected market demand, current market sentiment and the company’s past financial performance.

Example of Face Value and Premium Pricing

If the company has determined the face value of the share is fixed at INR 10 and the IPO price at INR 100. In this case, the difference between the face value, which is INR 10, and the IPO price, which is INR 100, is called the premium. The premium here is INR 90, which is decided by the company in collaboration with its advisors based on the demand for the company and valuation.

This premium over face value will enable companies to raise adequate capital through the IPO. It is important for investors to understand that the face value itself is purely nominal, but the premium reflects market interest and the company’s expected growth potential.

How to Find Face Value in an IPO?

Even though the face value is pre-established by the company, the steps to calculate it are below. Investors can also readily access this information.

• Check Prospectus: To issue shares through an IPO, the company must publish a prospectus. This prospectus includes all the critical financial information. It also contains information regarding the face value of shares, issue price, and so on.

The face value can be obtained by dividing the total equity capital of a particular company by the outstanding shares.

For Example: If equity capital is 100 crores and outstanding shares are 10 crores, then the face value would be INR 10 (100 crore/10 crore).

• Financial Platforms and Stock Exchanges: Most financial platforms and stock exchanges publish the face value of IPO shares. 
• Brokerage Websites: Most of the time, the details of the IPO, including the face value of the shares, are available on brokerage websites.

Why does Face Value matter in an IPO?

It is important for investors to understand the meaning of the face value of shares in an IPO due to the following reasons:

• Dividend Calculation: Generally, dividends are declared based on the face value of the shares. For example, if a company declares a 10% dividend on a share with a face value of INR 10, then every share will get INR 1 as a dividend.

• Stock Splits: In a stock split, companies divide the face value of its shares to make them affordable for more investors as the share price decreases. It also increases the number of shares available for trading in the market. For example, a company splits a share with a face value of INR 10 into two shares with a face value of INR 5 each. Suppose the current market price was INR 300. Then, after the stock split, the shares of the company will trade at INR 150.

• Accounting Records: The face value is of much importance in accounting and is employed in the financial statement of a company to signify the original contribution of shareholders.

How to Invest in an IPO with Knowledge of Face Value

Investing in an IPO requires investors to have knowledge of face value when judging the pricing of the IPO. The face value can be used to evaluate the premium at which the IPO price is set. Favorable market sentiments could be reflected by a high premium, but the investors should ascertain if such a premium is justified by the strong financials and future growth prospects of the company.

Read Also: What is DRHP (Draft Red Herring Prospectus)?

Conclusion

The face value of shares in an IPO is one of the most critical data that investors must understand. By understanding what is face value in an IPO, an individual can better assess dividends, stock splits, and financial statements. Even though the face value doesn’t influence the market price, it helps gain insight into the pricing of the company’s IPO. Armed with this knowledge, investors are better equipped to make informed investing decisions.

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