Initial Public Offerings or IPOs are a great source of investment today. Everyone is interested in investing in IPOs. Let’s look at the process of listing price and how companies determine IPO price.
Importance of IPO
IPOs are a great source of raising funds. A company becomes a public limited company from a private limited company while selling its shares to the public through an IPO.
This IPO becomes really important for investors as it gives one a chance to take hold of new shares in the market. Also, if the company performs well, the listing price of the shares goes really high.
Thus, IPOs give you a chance to gain profits in less time. But this isn’t the case always. Therefore, let’s understand how companies come to know about their performance in their IPO.
Oversubscription and Undersubscription
These days most companies opt for a book-building issue. Thus, through this, they get an idea about the final offer price decision. A company hires an investment bank to conduct its IPO. This investment bank helps the company in deciding the issue price. There are two scenarios in this case.
- Oversubscription – If the company received more applications than the shares it wants to allot, it is called oversubscription.
- Under subscription – On the other hand, if the company receives fewer applications than the shares it wants to allot, it is under subscription.
In the case of under subscription, the issue price is on the lower edge. Whereas oversubscription gives the company a chance to increase its issue price.
What is the Listing Price and Who decides it?
When the company decides on the issue price and closes the IPO, it also lists those shares on the stock exchange. Here, the exchange board after looking at the demand for shares decides the listing price.
Note – While the lead managers and syndicate members of the company determine the issue price, it is the Exchange Board i.e., BSE or NSE who decides the listing price of the company.
How is the listing price decided?
The exchange decides the listing price by looking at the demand for the shares. After the closing of the IPO, there is a three days gap between the IPO and the listing of shares on the exchange board.
The exchange implements a technique called price discovery. Based on the number of orders that the company receives, it decides the listing price.
If the demand for the shares is high, the shares list at a higher price than the issue price.
For example, Nykaa a well-established Indian cosmetic company conducted its IPO last year. The issue price for this IPO was Rs. 1,110. After this when the company was listed on BSE, the listing price rose to Rs. 2,001.
On the other hand, SBI Cards and Payments conducted its IPO in 2020. The issue price of the shares in the IPO was Rs. 755. Whereas, when the exchange board listed the shares, the listing price was determined as Rs. 658.
Thus, the listing price of shares on their debut in the market completely depends on the exchange boards. The company’s market value and growth prospectus also play a major role in the process.
The listing price of IPO shares completely depends on their demand in the stock market.
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