What is the Issue Price in IPO?

How Does the IPO Process Begin?

The IPO process begins when a company decides to raise funds by issuing shares to the public. To initiate this, the company must appoint a merchant banker. This financial intermediary plays a central role in preparing detailed documentation, coordinating regulatory filings, managing investors and guiding the company through the public market entry.

During this initial phase of the IPO Process, the company will generate a Draft Red Herring Prospectus (DRHP), which is submitted to the Securities and Exchange Board of India (SEBI). The SEBI will thoroughly review the DRHP and, within 21 days, will provide the company with any comments or suggestions for amendments or changes to the DRHP.

Once the company receives the comments from the SEBI, the company will amend the DRHP and resubmit the amended DRHP for SEBI approval. After SEBI approval, the company prepares and submits the final prospectus, which serves as the official issuance document for its listing and trading at the time of the IPO launch.

Understanding the Issue Price

Before a company goes public, one of the most important decisions they need to make is what to set as its stock's issue price, the first offering price of its stock when it becomes public.

In order to find the "sweet spot" where the company's financial needs and the investors' interests connect, the company works closely with an investment bank, also known as the underwriter.

The two entities determine the overall issue price, market the offering, and determine how many shares investors want to buy. The amount of money raised from selling shares is directly tied to the issue price.

Although the underwriter wants to set the price as high as possible to maximise how much money the company can generate, if they set the price too high, there may not be enough demand for people to invest.

In addition, the issue price will also impact how much of the company each shareholder owns. To determine the issue price, underwriters will analyse many factors, including the current state of the market, historical financial performance of the company, the appetite of the investor base, as well as projected demand for the shares once they are offered.

What Determines the Issue Price?

Many different factors determine the issue price of shares. One key factor that affects price is investor demand for shares. If a lot of people want to buy shares, the company will be able to charge more per share because of the increased interest.

How financially sound a company is, how it has performed over time and its potential for future success all affect the amount the company can expect to be valued at. Companies that have strong financial results, continued growth in revenue and good prospects for further growth are going to be valued at higher prices.

Another factor affecting pricing can be:

• Pricing is influenced by whether the company uses the fixed-price method or the book-building method to offer shares.

• The final share price is determined based on the pricing method chosen.

How to Calculate The Face Value?

Investors often come across the term face value together with the issue price of securities. The term face value refers to the nominal or "stated" value assigned to a given stock issued by a company, which does not fluctuate with changes in the securities market, and typically retains only historic significance.

The face value is usually a relatively low number, i.e., ₹1, ₹2, or ₹10, and as such has little tie to the current value or prospect of the stock as calculated using available data by financial analysts or market.

Face value also tends to differ materially from the issue price in many IPOs; while the issue price represents the amount paid for the shares, the face value does not include the additional premium associated with various attributes of the company, including brand reputation, financial results and growth expectations.

Calculating the Listing Price

The initial price at which shares of a company commence trading on the stock exchange is referred to as the listing price. The listing price may differ (e.g., be higher or lower) from the company's IPO price.

Thus, there are many factors that affect the determination of a company's listing price, including market sentiment, total investor interest in the stock and the perceived value of the company, as well as general market trends.

To arrive at an approximation of the company's listing price, one broad approach would be to use the company's prospectus to find the value of the total number of shares being offered, then multiply the price per share by the total number of shares offered to arrive at the total value of the IPO.

Issue Price vs. Market Price

Investors need to be aware of the difference between an offering price and the current market price. The company sets the offering price when it first offers shares for sale at initial public offerings (IPOs), but as soon as trading begins, the market price may change frequently.

The market price is determined solely by supply and demand in the marketplace. When there are many buyers interested in purchasing stock, the market price will increase. The term used to describe this increase is "pop".

Conversely, if there are few buyers interested in purchasing stock, the market price may ultimately be the same or lower than the offering price, this occurrence is referred to as a "flop".

Listing Price vs. Issue Price

The issue price is established before the initial public offering (IPO) however, the listing price is set by the exchange when trading begins on the first day of trading.

The two differ in some cases due to investor sentiment or fear about the company's stock. Also, market conditions, the number of subscriptions received and the trading restrictions placed on investors impact how and at what price an investor can sell their shares immediately after selling their shares.

Face Value vs. Issue Price

The exchange sets the listing price, while the issue price is determined before the IPO. The difference between these prices may arise from the feelings of investors or apprehensions regarding the stock of the organisation.

The prices may also vary depending on a variety of market factors, the amount of subscriptions received and the restrictions placed on investors' ability to trade their shares once sold.