What is Face Value in an IPO?

What is Face Value in an IPO?

Face value is the fixed price a company sets for its share before going for an Initial Public Offering (IPO). It is also known as ‘Par Value’. The face value can be any amount, such as 2 INR, 10 INR, or INR 1000. It depends on the company.

Face Value vs Issue Price

The issue price is the price at which the share is offered to the public for the first time through an IPO. It is also known as the price band as the issue price is a range. For example, it can be INR 500 to INR 525. The issue price is the face value of the stock plus the premium that the company charges investors for their shares.

Simply put,

Issue price of the share = Face value of the share + Premium that the company charges

The premium a company charges over the face value isn’t a random number. A lot of analysis and valuation goes into coming up with the premium number. The corporation determines the premium based on multiple performance metrics, including historical financial performance, profitability, stability, and potential for future growth.

A company that is performing extraordinarily well is quite sure that its investors will not mind paying a higher premium for the stock.

On the other hand, the company that is not operating well, however, sets the issue price close to face value to attract and gain potential investors.

Importance of Face Value

After the IPO and when the shares trade on the stock market. A company’s stock price fluctuates based on market conditions and the company’s performance. The market forces like demand and supply and other factors determine the share price, but not the face value of the share. Thus, it is why firms use face value to announce share splits. For example, a company’s share price currently trades at the INR 6,000 level and has a face value of INR 100. Since the share price is high, it often restricts retail and small investors from investing. Companies end up splitting their stocks to add more liquidity to the stock. Say, split it 1:5.

After the split, the share price will decrease to INR 1,200, and the face value will be INR 20.

Furthermore, companies use face value while distributing dividends. When announcing a dividend, firms use the face value rather than the share price as face value is a fixed value. If a firm with a share price of INR 6,000 and a face value of INR 100 declares a dividend equal to 10% of the face value, the dividend per share will be INR 10, and not INR 600 (which is on the current market value).

Thus, if you hold 100 shares of the company, you will receive a dividend of INR 1,000.

Difference between Face Value, Book Value and Market Value

Following are the key differences between face value, book value and market value:

Basis of Difference	Face Value	Book Value	Market Value
Meaning	Face value is the nominal value of the stock when it goes for a public issue. The market conditions (demand and supply) have no impact on face value. To determine the face value, you’ll need the equity share capital of the company and the number of outstanding shares.	Book value is the total value of a company’s assets that shareholders are entitled to receive upon liquidating the company.	Market value is the current market price of a stock. This value may fluctuate depending on market conditions – demand and supply, changes in macroeconomic conditions, government policies or any international events.
Value	Face value is a fixed value and is not affected by markets. However, it changes as a result of stock splits.	Book value is the company’s net worth as reflected in its books. It fluctuates according to the company’s performance.	It is computed by multiplying the current stock price by the number of shares outstanding. The term for this is market capitalisation.