Why IPOs have a Discounted Price to Issue Price? (2024)

FAQs

Why IPOs have a Discounted Price to Issue Price? ›

The shares are sold to institutional investors such as private equity firms or hedge funds, and usually at a significant discount to the IPO price. Companies do this to get some level of definite fundraising in case the IPO price is too high and demand for their stock isn't what they expected.

Such a situation is also possible if the company belongs to a sector that finds itself out of favour. An issue that struggles to get fully subscribed normally gets a tepid listing in the bourses. Aggressive pricing of the IPO This is one of the most common reasons for an IPO listing at a discount to the issue price.

An oversubscription will occur when the number of shares provided by a company is not enough to meet the demand in the market. However, as the shares are dumped, the listing price of the shares fall consequently.

The IPO listing loss occurs when shares are listed at a lower price than the issue price. In such cases, the listing of the shares is referred to at a discount. The IPO Issue Price is the price of the IPO share decided by the Issuing Company at the time of the IPO Offering.

The issue price is the price at which the shares are first sold to investors in an IPO, whereas the listing price is the price at which the shares get listed to trade on a stock exchange after the IPO.

Yes, an IPO can list below the issue price (also known as an IPO listed at a discount).

We found that IPOs on average were underpriced by 47% and that 32 IPOs were overpriced by approximately 17%–18%.

According to Section 53 of the Companies Act, 2013, except as provided in section 54 (i.e. issue of sweat equity shares), a company shall not issue shares at a discount. Any share issued by a company at a discount price shall be void.

The reason for shares being issued at a discount to market value during an IPO is to attract potential investors and create demand for the company 's stock . By offering shares at a lower price , the company can generate more interest and potentially raise more capital .

An offering price refers to the price of a stock set by an investment bank during the IPO process. An offering price is based on the company's legitimate prospects and set at a level that will attract interest from the general investing public.

Why are issue price and listing price different? ›

The Issue Price is the first price at which the shares are sold. The listing price is the price at which the shares will trade on the stock market after the initial public offering. First, the issue price is chosen by the corporation, while the listing price is determined by market supply and demand.

The IPO listing price is different from the offer price and is decided majorly by the investment bank which is assisting the company during the IPO launching process. After the successful launching of an IPO on the stock exchange, it becomes available for every shareholder to trade in the stock market.

In instances where demand surpasses supply, allocation is determined through a lottery system. Subsequently, the IPO registrar announces the IPO allotment status approximately 1 week after the subscription deadline.

The discount is the amount by which the share price is lower than net asset value, expressed as a percentage. In plain terms, it is a measure of the popularity of an investment company. Shares in investment companies often trade at a price different from the value of the underlying net assets.

IPO PRICING

Pricing a company at an initial public offering (IPO) usually defaults to a discount to a peer group of similar companies that are already listed. If this basket of “comps” is valued at an average multiple of 15x forward earnings, the issuing broker will discount from this, and hope the fund managers agree.