When a company’s shares are issued for public sale for the first time, it is known as an Initial Public Offering (IPO). As an investor, you can subscribe to the IPOs of promising companies to get their shares at a reasonable price.
But before you invest your hard-earned money in an IPO, you must understand certain terminologies. One such term that you should know about is “Face Value”. Let’s take a deep dive to understand the meaning and importance of the term, face value in an IPO.
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The face value refers to the nominal or initial value of shares the company decides at the time of IPO launch. It is also known as the par value or base value. The face value of shares is usually Re. 1, Rs. 2, Rs. 5, Rs. 10, or even Rs. 100 in some cases.
Generally, most companies in India tend to choose Rs. 10 as the face value of the shares. They have to mention this in the Draft Red Herring Prospectus (DRHP) that they submit to the Securities and Exchange Board of India (SEBI). Once assigned, the face value of the shares of a particular company remains fixed, irrespective of how it performs in the future.
The issue price and market value of shares are some other terms that might confuse you. That is why you must know the difference between face value, issue price, and market value of shares. Let's discuss the other two terms as you already know what face value is.
The issue price is the price at which the shares of a company are sold to the public for the first time. The company decides based on the demand it is receiving from investors for its IPO. In the case of a book-built IPO, the company first decides on a price band, and then determines the issue price for its shares. The difference between the face value and the issue price of shares is known as the “premium”.
For example, suppose a company has chosen Rs. 10 as the face value of its shares and Rs. 25 as the issue price. It means the company is asking for a premium of Rs. 15 for selling its shares to the public.
Issue price of a share = Face value + Premium
On the other hand, the market price of a share is the price at which it is currently being traded on the stock exchanges. While the issuing company decides the face value and issue price of shares, the market price is determined by factors like prevailing market conditions, supply, demand, government policies, national and international events, etc.
A share's market price keeps fluctuating after its listing while the face value and issue price remain fixed.
All the while we were discussing the face value of shares, you might be guessing its significance. It plays a crucial role when the issuing company announces a stock split or distributes dividends to investors. These corporate actions are based on the face value, not the shares' market value.
For example, if the face value of a share is Rs. 10, and the company announces a stock split in a 1:5 ratio, the face value of each share after the stock split will become Rs. 2 per share. Similarly, if a company declares a 100% dividend on its shares with a face value of Rs. 10 per share and a market value of Rs. 200 per share, the investors will receive Rs. 2 for every share they hold, not Rs. 200.
Face value in an IPO might not be important if you are looking for short-term trading. However, if you invest in an IPO for the long term, you must consider face value and other parameters to make an informed decision. With Motilal Oswal, you can open an Demat account for free and start trading in shares seamlessly.