What Is the Issue Price of an IPO?
Initial Public Offering (IPO) is when a private company goes public for the first time. Using an IPO, a company either raises equity capital by issuing new shares or sells its existing shares to the public via an offer for sale in the primary market and gets listed on stock exchanges.
To get help on the entire IPO process, companies appoint merchant bankers, who prepare a Draft Red Herring Prospectus (DRHP) and ensure compliance with all rules and regulations. Then, the Securities Exchange Board of India (SEBI) reviews it and based on their comments, the company prepares its final offer document Red Herring Prospectus (RHP). At this stage, the company decides on the issue price of its IPO.
In this blog, we will learn about the issue price of IPOs in detail.
What Is the Issue Price in an IPO?
The price at which shares are sold to investors for the first time is the issue price. It is crucial as it shows how much capital a company can raise through its IPO.
While a company will always want to set the issue price high, it should not be high enough to discourage investors from purchasing it because issue prices directly impact the proportion of shares held by investors and influence investors’ sentiments toward an IPO.
Generally, companies appoint merchant banks for their underwriting services and are responsible for setting this price. Investment banks consider several factors, such as the company’s financial history, demand for its stocks and market conditions, before setting the issue price.
What Is the Price Band of an IPO?
A price band is the lower and upper limit of the share price within which the company will sell its shares to IPO applicants. In other words, it is the price range within which investors can bid for shares for an IPO launched through the book-building method.
While the lower limit of the price band is known as a floor price, and the upper limit of the price band is called a cap price. Depending on the bid price and public sentiment, it announces the cut-off price. A cut-off price is a price at which a company issues its shares to investors. Only bids submitted at a cut-off price or above will be considered for IPO allotment.
It will extend the initial offer period for 3 days if a company revises its price band. The company informs of such revisions via press releases and uploads the notification on the websites of its book-running lead managers (BRLM).
How Is an IPO’s Issue Price Decided?
Discussed below are factors that determine an IPO issue price of a company:
- Demand from potential investors is an essential factor influencing an IPO’s price because a company can set a high initial price if there is high demand for its shares. Merchant bankers who provide underwriting services to the private company evaluate this demand and set the issue price accordingly. Sometimes setting up an unexceptionally high price for a higher valuation might negatively impact the issuing company
- Another important factor that helps in determining the issue price is the company’s financial growth. For instance, a company performing well and undergoing rapid growth might set a higher price for its shares.
- The issue price also depends on the type of IPO, i.e. whether it’s a fixed price issue or book building issue. Investors are well aware of the issue price for a fixed-price IPO. However, the issue price is not sure in a book-building process, i.e. people know the share price only after the bidding process ends.
What Is the Face Value of an IPO?
Face value, also known as a par value, refers to the preset price at which shares are issued during an IPO. It is a nominal value used to calculate the price, price band and dividend payouts. By itself, the face value does not reflect the actual value of a company.
An IPO issue price is the face value of shares plus a premium the company charges from its investors.
What Is the Listing Price of an IPO?
The opening price of a stock when it features on a stock exchange for the first time is called its listing price. Merchant banks hired by a company for assistance with its IPO process are responsible for determining this price. A stock’s market demand determined during the 3 days of an IPO decides this price.
Other factors influencing an IPO’s listing price are market sentiments, the company’s overall growth prospects, Offer for Sale (OFS) value, IPO subscription and grey market premium.
Differences between Issue Price and Listing Price
The table below provides differences between the issue price and listing price:
|Listing Price||Issue Price|
|It is the price at which shares start trading on stock exchanges.||It is the price at which shares are sold to investors.|
|Supply and demand in the market determine the listing price, which can be higher or lower than the issue price.||The company sets this issue price.|
An IPO is when for the first time, a company issues shares to the public. This is when a private company decides to go public. The price at which shares are sold to investors for the first time is known as the issue price. This price is different from the face value and listing price.
Before subscribing to an IPO, an investor should assess the company’s fundamentals and at what valuation the company is getting listed..
Frequently Asked Questions (FAQs)
What is the cut-off price of an IPO?
The offer price at which the shares are issued to investors is the cut-off price. It can be any price that falls within the given price band.
For how many days will an IPO remain open for the public?
Generally, subscription lists for public issues remain open for a minimum of 3 working days and up to 10 working days. In case of a book-building issue, bidding remains open for 3-7 working days. It is extendable by 3 days in case of price band revision.
What is the difference between the IPO cut-off price and the floor price?
The cut-off price is the offer price at which companies issue shares to their investors, while the floor price is the lowest price of the price band at which people can bid to purchase a company’s shares.
What is a lot of size?
The minimum number of shares a bidder must purchase is the lot size. The company fixes it. Zomato set the lot size at 195 shares. As a result, investors placed bids for lots of 195 shares, two lots (195 * 2 = 390 shares), and so on, rather than one share or even 100 shares.
Can I revise my bid after applying for an IPO?
Yes, retail investors applying in the retail IPO category (under ₹2 lakh) may change or withdraw their bids up to the offer closing date. However, if you fall into the NII or QIB category of investors, you are not permitted to withdraw, cancel, or lower your bid.