What Is Issue Price in an IPO? Meaning and Importance

When a company raises capital through an Initial Public Offering (IPO), it offers its shares to the public at a predefined price known as the issue price. This price forms the basis for share allotment during the offering period and influences demand, subscription levels, and the stock’s performance once trading begins on the exchange. It also establishes the company’s initial market valuation at the time of listing.

The issue price is the price at which shares are offered to the public during an IPO. It is determined through one of the following mechanisms:

Fixed Price

A single price is announced in advance, and all applicants apply at that price.

Book Building

A price band is specified (for example, ₹95–₹100). Investors submit bids within this range, and the final issue price, referred to as the cut-off price, is determined based on demand.

Example:

If an IPO is offered in a price band of ₹95–₹100 and bids are concentrated near the upper end, the final issue price may be fixed at ₹98.

The issue price is determined after evaluating several factors, including:

• Company Fundamentals:
  Financial indicators such as revenue, profitability, earnings per share (EPS), book value, and capital structure.
  

• Market Conditions:
  Prevailing market sentiment, liquidity conditions, and broader equity market trends.
  

• Peer Valuation Comparison:
  Valuation multiples of comparable listed companies operating in the same sector.
  

• Merchant Banker Assessment:
  Lead managers assess demand indicators and pricing ranges based on regulatory disclosures and investor feedback.

The face value of an IPO refers to the nominal value assigned to each equity share by the issuing company at the time of incorporation. It is a statutory value recorded in the company’s balance sheet and is used for accounting, legal, and regulatory purposes rather than for market pricing.

In India, equity shares typically carry a face value of ₹1, ₹2, ₹5, or ₹10 per share, as disclosed in the offer documents. The issue price of an IPO is usually higher than the face value, and the difference between the two is classified as securities premium.

Face value plays a role in determining aspects such as share capital structure, calculation of dividends (if declared as a percentage of face value), and adjustments during corporate actions like stock splits or bonus issues. However, it does not reflect the market value of the share or indicate how the stock may trade after listing.

Understanding the distinction between face value and issue price helps clarify how share pricing is structured in an IPO and why nominal values differ from offer prices set in the primary market.

The IPO listing price is not a figure that is pre-calculated or fixed by the issuing company or regulators. It is discovered through market mechanisms on the day the shares are listed on the stock exchange.

On the listing day, buy and sell orders placed by investors during the pre-open session determine the equilibrium price at which maximum tradable quantity is matched. This price becomes the listing price. The process factors in demand and supply dynamics, including:

• The final IPO issue price

• Bid volumes from buyers and sellers at various price levels

• Overall market conditions at the time of listing

• Investor participation across retail, institutional, and non-institutional categories

Stock exchanges use an electronic price discovery mechanism to arrive at a single opening price that balances demand and supply. As a result, the listing price may be higher, equal to, or lower than the IPO issue price, depending on how the market values the company at the time of listing.

This mechanism ensures that the listing price reflects real-time market assessment rather than a predetermined calculation.

The issue price influences how an IPO is positioned in the market and how it is received during subscription and listing.

Subscription Levels

Pricing affects investor participation and demand during the offering period.

Listing Performance

The relationship between the issue price and market demand can influence whether shares list at a premium, discount, or near the offer price.

Initial Market Valuation

The issue price establishes the company’s valuation at the point of listing.

The issue price and market price represent two distinct stages in a share’s lifecycle within the equity market.

The issue price is the price at which a company offers its shares to investors during an Initial Public Offering (IPO). This price is finalised before listing, either as a fixed price or as a cut-off price discovered through the book-building process. It applies uniformly to all successful applicants in the IPO.

The market price, on the other hand, is the price at which the shares trade on the stock exchange after listing. This price is determined through real-time buying and selling activity and fluctuates continuously based on demand, supply, broader market conditions, and company-specific developments.

While the issue price is established as part of the primary market process, the market price reflects secondary market dynamics once the shares are publicly traded. The difference between the two highlights how initial valuation compares with ongoing market-driven price discovery.

Peer Valuations:
Pricing is often assessed in relation to comparable companies in the same industry.

Growth Expectations:
Projected business performance and expansion plans are reflected in valuation assumptions.

Offer Document Disclosures:
The Draft Red Herring Prospectus (DRHP) outlines financial information, risk factors, and the pricing rationale.

In some IPOs, companies have offered shares at prices that were later followed by higher listing prices due to strong demand at the time of listing. In other cases, shares have listed below the issue price when market conditions or demand differed from expectations. These outcomes illustrate how pricing and demand interact during the IPO process.

In a book-built IPO, the cut-off price refers to the final price at which shares are allotted to investors after the bidding process is completed. During the subscription period, investors place bids within the announced price band. Based on demand across different price levels, the issuer and its merchant bankers determine a single price that clears the issue—this becomes the cut-off price.

The cut-off price represents the highest price at which the company can allot all offered shares while matching investor demand. Once finalised, it applies uniformly to all successful applicants, irrespective of the bid price entered within the permitted range.

Retail individual investors are permitted to select the “cut-off” option while applying, which allows their application to remain valid at the final discovered price without specifying an exact bid amount. The cut-off price is disclosed after the issue closes and forms the basis for share allotment and refund processing, in accordance with applicable SEBI regulations.

The IPO issue price represents the value at which shares are offered to the public during a company’s market debut. It reflects a combination of financial metrics, market conditions, and demand assessment at the time of the issue. Understanding how the issue price is set provides context for interpreting subscription outcomes, listing behaviour, and initial market valuation.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.