Face Value in IPO
In this article, we are going to discuss the face value in IPO or interchangeably the face value of the share.
Face value is the nominal value of the share also referred to as par value or nominal value. Its more commonly used with bonds/debentures.
The same has been decided by the security issuer. Face value could be any value be it Re 1, 2, 5, or 100.
Generally, it’s a fixed value unless the company decides to split the face value to generate more liquidity into the market.
Now let’s understand the rationale behind the face value why the same is pre-defined while launching an IPO.
It helps in determining the current state of the company. Along with that, it helps in calculating the interest that a company will be paying to its investors on the securities.
In the modern era, face value does not have a significant role as companies keep the face value very minimal at times infractions or cents.
It is used to calculate the accounting value of a company’s stock for a company’s balance sheet. So, it is clear that the face value has no relation to the current market price of the security.
Let me take you through an example to understand face value. In Zomato IPO company kept the face value of their equity share as Re.1. Suppose a company has declared a 10% dividend or interest on the security.
And face value of the share is Rs100 whereas the market value is Rs. 5000 so as an investor your interest or dividend will be calculated on the face value, not on the market value. Then you can expect Rs.10 per share/bond instead of Rs. 500.
Usage of Face Value by Company
The company uses face value as its fixed value unaffected by the market conditions or the company’s performance.
The company uses this face value as a tool when they announce a stock split as this company can create more liquidity in the market.
Earlier company has issued 1000 shares each for Re.10 now their market value is 5000 per share so there are chances less number of investor would buy keeping the market value constant.
Suppose a company has split one share into five so after the split so the face value of each share will go down to Rs.2 and the market value of each would be 1000 per share which be more affordable for the prospective buyers.
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How to Calculate?
There is not a fixed method by which a company can derive the face value of the share.
Generally, it’s decided by the company using arbitrary methods.
Face Value can be calculated using equity share capital and the number of shares outstanding.
Face Value= Equity Share Capital/Number of Shares Outstanding.
Can Face Value be Less than 1?
No, face value cannot be less than Re.1 as a stock split will not be possible in such a scenario.
As per SEBI guidelines company can keep the face value minimum as Re 1.
No value lesser than Re 1 will be accepted as face value for listing on the prospectus.
When a stock performs very badly on the platform that its market value goes down the face value.
So If the selling value is much less than the face value, it is sold at a discount or below par that is below the face value resulting in less selling price of the share.
Can Face Value Increase?
Yes, face value can be increased when the company announces stock splits to increase the liquidity in the market keeping the market value constant for the shares. And we have discussed the example of a stock split in the usage of the face value in this article just scroll a little above.
As we have discussed face value in detail hope now it’s clear the basics of face value and its importance.
One should not get confused between face value and market value.
Let me re-iterate the same. Market value will be the traded value of the stock in the secondary market.
|Face Value||Market Value|
|Face value is more on paper for listing purpose||Whereas market value will provide the current price of the stocks in real number|
|Face Value=Equity Share Capital/ Number of shares outstanding||Market value=Current Share price* Number of shares outstanding|
|Generally, it’s a fixed number decided by the issuer of the security||The market value of the share is decided by the demand and supply of that stock in the market|
|Unaffected by the market and economic conditions||Affected by the market and economic conditions|
|Min face value can only be Re1||Whereas market value can be positive, negative, or infractions.|
So from the above explanation, it’s the clear face value of a share is not linked to market value in any way.
It carries its importance only in interest calculations and stock splits.