What is Face Value in an IPO? A Simple Guide for Investors

When you hear about an Initial Public Offering (IPO) in India, terms like "face value," "issue price," and "premium" often pop up. These terms can sound confusing, especially if you're new to investing. But don’t worry! In this blog, we’ll dive deep into what is face value in an IPO, why it matters, and how it impacts your investment decisions. By the end, you’ll have a clear understanding of this key concept, along with some practical insights to make smarter choices in the Indian stock market. 

What is Face Value in an IPO?

In the world of stocks and IPOs, face value is the nominal or original value of a share as set by the company issuing it. Think of it as the "base price" of a single share, as decided by the company when it first issues its shares. In India, face value is usually a small amount, like Rs. 1, Rs. 2, Rs. 5, or Rs. 10 per share. It’s printed on the share certificate and remains fixed unless the company decides to change it through actions like stock splits or consolidations.

For example, if a company sets the face value of its shares at Rs. 10, this is the value at which the share is recorded in the company’s books. But here’s where it gets interesting: when you buy shares in an IPO, you rarely pay just the face value. Instead, you pay a higher price called the issue price, which includes a premium. Curious about why this happens? Let’s explore further!

Why Does Face Value Matter in an IPO?

You might be wondering, "If I’m not paying the face value, why should I care about it?" Great question! Face value plays a few important roles in an IPO and beyond. Here’s why it’s worth understanding:

1. Determines the Issue Price: The issue price of an IPO is often set at a premium over the face value. For instance, if a company’s share has a face value of Rs. 10 and the IPO is priced at Rs. 500, the extra Rs. 490 is the premium. This premium reflects the company’s market potential, growth prospects, and investor demand.
2. Affects Dividend Calculations: Dividends in India are often declared as a percentage of the face value. For example, if a company announces a 50% dividend on a share with a face value of Rs. 10, you’ll get Rs. 5 per share as a dividend. If the face value were Rs. 2, the same 50% dividend would mean Rs. 1 per share. So, face value directly impacts your dividend income!
3. Influences Stock Splits and Bonus Shares: Companies sometimes split their shares or issue bonus shares based on the face value. A lower face value can make shares more affordable, attracting more investors. For example, a company might split a Rs. 10 face value share into two Rs. 5 face value shares to boost liquidity.
4. Helps Compare Companies: Face value provides a standard way to compare shares of different companies. It’s like a common denominator that helps investors understand the company’s capital structure.

Now, are you curious about how face value fits into the bigger picture of an IPO? Let’s break down the IPO process to see where it comes into play!

How Face Value Fits into the IPO Process?

When a company in India decides to go public through an IPO, it’s essentially offering its shares to the public for the first time. Here’s how face value plays a role in this process:

1. Setting the Face Value: Before launching the IPO, the company decides the face value of its shares. This is usually a small amount (like Rs. 1 or Rs. 10) to make the shares accessible to a wide range of investors. The face value is mentioned in the company’s Draft Red Herring Prospectus (DRHP), a document filed with the Securities and Exchange Board of India (SEBI).
2. Calculating the Premium: The company, along with its investment bankers, determines the issue price for the IPO. This price is typically much higher than the face value because it includes a premium based on the company’s financial health, market conditions, and investor demand. For example, a company with a face value of Rs. 5 might set an IPO price of Rs. 200, where Rs. 195 is the premium.
3. Raising Capital: The face value contributes to the company’s share capital, which is the total value of all shares issued (face value × number of shares). However, the premium goes into a separate account called the share premium account, which the company can use for growth or other purposes.
4. Listing on Stock Exchanges: Once the IPO is complete, the shares are listed on stock exchanges like the BSE or NSE. The market price of the shares may rise or fall based on supply and demand, but the face value remains unchanged unless the company takes specific actions like a stock split.

Want to know how face value differs from other terms like market value or book value? Let’s clear up the confusion!

Face Value vs. Issue Price vs. Market Value

These terms often get mixed up, so let’s break them down with a simple example:

• Face Value: This is the nominal value of the share, say Rs. 10. It’s fixed by the company and doesn’t change unless there’s a corporate action like a split or consolidation.
• Issue Price: This is the price at which shares are offered during the IPO. It includes the face value plus a premium. For example, if the face value is Rs. 10 and the premium is Rs. 190, the issue price is Rs. 200.
• Market Value: After the IPO, the share trades on the stock market, and its price fluctuates based on demand and supply. The market value could be Rs. 300, Rs. 150, or even Rs. 50, depending on how investors perceive the company’s future.

How Do Companies Decide the Face Value?

Choosing the face value is a strategic decision for companies in India. Here are some factors they consider:

1. Affordability: A lower face value (like Rs. 1 or Rs. 2) makes shares more affordable, encouraging retail investors to participate in the IPO. This can increase demand and liquidity.
2. Market Perception: A low face value can make a company’s shares seem more attractive, as investors often associate lower-priced shares with growth potential.
3. Dividend Strategy: Companies that want to pay higher dividends per share might opt for a higher face value, as dividends are calculated as a percentage of face value.
4. Regulatory Requirements: In India, SEBI guidelines and the Companies Act, 2013, influence how companies structure their share capital, including face value.

For example, a tech startup might choose a face value of Rs. 1 to attract more investors, while an established company might stick with Rs. 10 to signal stability. Ever wondered what happens to face value after the IPO? Let’s find out!

What Happens to Face Value After the IPO?

Once the IPO is over and the shares are listed on the stock exchange, the face value stays the same unless the company takes specific actions. Here are two common scenarios that can change the face value:

1. Stock Split: A company might split its shares to make them more affordable. For example, if a share with a face value of Rs. 10 is split into two shares, the new face value becomes Rs. 5 per share. This doesn’t affect the total value of your investment but increases the number of shares you hold.
2. Stock Consolidation: In rare cases, a company might combine shares to increase the face value. For instance, two shares with a face value of Rs. 5 might be consolidated into one share with a face value of Rs. 10. This reduces the number of shares you hold but keeps the total value the same.

These actions are usually done to adjust the share price or improve liquidity. Curious about how face value affects your returns? Let’s explore that next!

How Does Face Value Affect Your Returns?

As an investor, face value might seem like a small detail, but it can influence your returns in several ways:

1. Dividends: As mentioned earlier, dividends are calculated based on face value. A company with a lower face value might offer smaller dividends per share, even if the percentage is the same. For example, a 100% dividend on a Rs. 2 face value share gives you Rs. 2 per share, while the same dividend on a Rs. 10 face value share gives you Rs. 10.
2. Capital Gains: The face value itself doesn’t directly affect capital gains (the profit you make when you sell shares at a higher price). However, a lower face value can lead to a lower issue price, making the IPO more accessible and potentially increasing demand, which could drive up the market price.
3. Affordability and Liquidity: Shares with a lower face value are often more affordable, attracting more investors. This can lead to higher trading volumes and better liquidity, which might make it easier to buy or sell shares.

Want to see a real-world example? Let’s look at a popular Indian IPO to bring this to life!

Real-World Example: Zomato IPO

Let’s take the example of Zomato, a well-known Indian company that went public in 2021. Here’s how face value played a role:

• Face Value: Zomato set the face value of its shares at Rs. 1.
• Issue Price: The IPO price was set at Rs. 76 per share, meaning the premium was Rs. 75.
• Listing Price: On listing day, Zomato’s shares debuted at Rs. 116 on the NSE, a 52.6% premium over the issue price.

Because the face value was low (Rs. 1), Zomato’s shares were accessible to a wide range of investors, contributing to the IPO’s massive oversubscription. The low face value also meant that dividends (if declared) would be smaller per share compared to a company with a higher face value, but it made the shares more liquid and attractive.

Curious about how to evaluate face value when applying for an IPO? Here are some tips!

Tips for Evaluating Face Value in an IPO

When you’re considering investing in an IPO, keep these points in mind about face value:

1. Check the DRHP: The Draft Red Herring Prospectus provides details about the face value, issue price, and premium. This document is available on SEBI’s website or the company’s IPO portal.
2. Understand the Premium: A high premium over the face value could mean the company is confident about its growth, but it also increases your investment cost. Compare the premium with the company’s financials and industry peers.
3. Look at Dividend History: If you’re a dividend-focused investor, check the company’s dividend policy and how face value affects dividend payouts.
4. Consider Market Trends: A low face value might signal a company’s intent to attract retail investors, which could lead to higher demand and price volatility after listing.
5. Assess Long-Term Value: Don’t focus too much on face value alone. Look at the company’s fundamentals, growth prospects, and market conditions to decide if the IPO is worth your money.

Still curious? Let’s wrap up with some key takeaways and a few FAQs to keep you engaged!

Key Takeaways:

• Face value is the nominal value of a share set by the company, usually Rs. 1, Rs. 2, Rs. 5, or Rs. 10 in India.
• It’s different from the issue price (face value + premium) and market value (post-IPO trading price).
• Face value affects dividends, stock splits, and the affordability of shares.
• A lower face value can make shares more accessible, while a higher face value might signal stability.
• Always check the face value and premium in the DRHP before investing in an IPO.

Frequently Asked Questions: Face Value

Conclusion

Understanding what is face value in an IPO is like unlocking a key piece of the stock market puzzle. It’s a small but important detail that affects your dividends, investment costs, and overall strategy. By knowing how face value works, you can make smarter decisions when applying for IPOs in India. Whether you’re a beginner or a seasoned investor, keeping an eye on face value, issue price, and market trends will help you navigate the exciting world of IPOs with confidence.