In an IPO (Initial Public Offering), you get shares at a premium to their face value. Whereas, the face value of a share is the “Nominal Value” or the “Par Value” mentioned in the company’s memorandum of association (MoA).
For a company, the face value serves as a reference point for accounting for share capital and regulatory purposes like filing returns with the Registrar of Companies (RoC), at the time of listing and coming out with an IPO.
Let us understand Face Value from the angle of the Indian Companies Act 2013 and SEBI regulations.
The Companies Act in India and Face value come into the picture when you form a private limited company.
The face value is a nominal value assigned to a share at the time of the company’s incorporation. This value represents the initial capital contributed by founders, promoters, and the initial shareholders.
The Company Act is silent on face value and does not specify any minimum or maximum value for face value. It just specifies a minimum of Rs. 100,000 needed as the authorized capital to start a private limited company.
The company has the flexibility to choose the face value of a single share. The face value can be any amount, such as Re. 1, Rs. 2, Rs. 5, Rs. 10, or Rs. 1000. It totally depends on the company.
There are companies with a face value of Rs. 3
Companies having shares with a face value of Rs. 4
And even companies having shares with a face value of Rs. 5
Securities and Exchange Board of India (SEBI) on the other hand governs the stock market and frames rules for listing, specifying a minimum face value of Rs. 1.
SEBI regulations do not explicitly define or regulate the face value itself. You should not worry much about face value when investing in an IPO.
For your understanding, the common rupee denominations for face value in Indian companies are Re. 1, Rs. 5, Rs. 10, and Rs. 100. The companies have the flexibility to choose other values based on their capital structure and specific requirements.
Here are some common face-value denominations
#1. Face Value of Re. 1
Many companies choose a face value of Rs. 1 per share. This allows for flexibility in setting the issue price and is commonly seen in both established and startup companies.
#2. Face Value of Rs. 10
A face value of Rs. 10 per share is also a common choice. You will find Rs. 10 face value used by companies with a larger capital base.
#3. Face Value of Rs. 100
Companies with a significant capital base might choose a face value of Rs. 100 per share. This is often seen in larger and more established companies.
#4. Other Face Values
Companies can choose other values that suit their specific needs. For example, some companies might use values like Rs. 5, Rs. 50 or Rs. 1000.
Can I Buy an IPO at Face Value?
In an IPO shares are not offered at their face value. The face value of a share is a nominal value mentioned in the company’s MoA. The actual price at which shares are offered to the public during an IPO is determined through a process known as “price discovery” or “book building”.
During an IPO, companies and investment bankers use book building to determine the price at which the shares will be offered to investors.
The IPO issue price is influenced by demand from investors, market conditions, and company fundamentals. Shares offered in the IPO are priced higher than the face value, especially if the company is well-received by investors and the demand is high.
You can’t buy shares in an IPO at their face value, but you can participate in the IPO by bidding for shares within the specified price range. Investors can place bids at various price levels within the price band, and the final issue price is determined based on the demand and supply dynamics.
Why is IPO Price Higher Than Face Value
Here are some key factors for the IPO price being higher than the face value.
#1. Market Value
The face value of a share is a nominal value stated in the company’s documents at the time of incorporation and doesn’t reflect the market’s assessment of the company’s worth.
The IPO price is determined by taking into account the company’s financials, growth prospects, industry trends, and market sentiment.
#2. Investor Demand
The IPO price is set at a level where there is sufficient demand from investors to buy the shares being offered.
#3. Underpricing Risk
Companies and investment bankers often price IPOs slightly below what they believe the market will bear. Underpricing can generate more interest from investors and create positive momentum.
#4. Unlocking Value
Companies going public often have growth plans and capital requirements that they intend to finance with the funds raised from the IPO.
#5. Market Sentiment
If market conditions are favorable and investors are bullish, companies may price their IPOs higher to capture the positive sentiment.
What is the Difference Between IPO Face Value and IPO Issue Price
The difference between IPO face value and issue price lie in their respective meanings and roles in the process of taking a company public and offering its shares to the public.
#1. IPO Face Value
Meaning: Face value, also known as par value or nominal value, is the nominal or original value of a share as stated in the company’s memorandum of association at the time of its incorporation.
Significance: Face value is primarily used for legal and regulatory purposes. It helps establish the company’s authorized share capital and plays a role in calculating certain financial ratios and regulatory compliance.
#2. IPO Issue Price
Meaning: The issue price is the actual price at which the company’s shares are offered to the public during an IPO. It is determined by taking into account various factors, like market conditions, investor demand, company fundamentals, and growth prospects.
Significance: The issue price reflects the market’s assessment of the company’s value and growth potential. It is the price at which investors can purchase shares during the IPO.
Key Differences
| Parameters | IPO Face Value | IPO Issue Price |
| Nature | Fixed nominal value | Varies within the price band |
| Purpose | Regulatory and accounting purposes | Reflect the market value of the shares |
| Calculation | Pre-determined | Determined through book building |
| Impact on Valuation | No impact on the company’s valuation | Directly affects the company’s valuation |
FAQs
Face Value is a nominal value stated in MoA, while Market Price is the actual price at which shares are bought and sold in the stock market. Market Price can vary based on supply, demand, and investor sentiment.
No, Face Value is not directly related to a company’s actual market worth. It’s a nominal value used for legal purposes and doesn’t reflect the current market value of the company or its shares.
Face Value remains constant unless the company takes specific legal steps to change it. However, the market price of shares can fluctuate daily after an IPO based on market conditions and investor perceptions.
The Issue Price is the price at which shares are offered to the public during an IPO. Issue price is determined by taking into consideration market demand, company performance, growth prospects, and investor sentiment.
No, a higher Face Value does not indicate a better company. It is a nominal value and does not impact the quality or performance of the company. A company’s financials, operations, and growth potential determine its value.
Face Value is relevant in an IPO as it helps establish the company’s authorized share capital and influences the calculation of certain ratios. However, the actual IPO price is determined through market mechanisms.
It’s uncommon for shares to be issued at Face Value during an IPO. Shares are typically offered at a price determined through market demand and price discovery mechanisms. This price can be higher or lower than the Face Value.
Face Value itself doesn’t play a significant role in an investor’s decision. Investors focus more on the company’s financial health, growth prospects, management quality, and the Issue Price when evaluating an IPO.
