What is the Public Offering Price (POP)? 

Whenever an IPO is offered to the public for subscription, there is a lot of excitement about it related to its expected listing price, the company’s business model, etc. But the key factor that an investor should consider is the Public Offering Price.

Here, we will give you an overview of the Public Offering Price, how it works, and why it is useful for an investor who is considering investing in an IPO.

What is the Public Offering Price?

The Public Offering Price is the price at which a company offers its shares to the public while raising money. It is the price at which the investor gets an opportunity to buy shares directly from the company instead of buying them through the secondary market. The company decides the public offering price only after considering several factors, including financial performance, future growth prospects, valuation, etc. 

How Does Public Offering Price Work?

The Public Offering Price works in the following manner:

• Decision to Raise Capital: This is the first step in determining the public offer price. The company decides to raise funds from public investors. The key purpose to raise fund can include business expansion, debt repayment, etc.
• Company Valuation: Before deciding the company’s public offer price, it appoints a merchant banker to evaluate the company’s valuation. The value is decided based on several factors such as financial performance, business model, etc.
• Announcement of Issue Price: The company announces the issue of shares through a fixed-price issue or a book-built issue. In a book-building issue, the company announces a price band within which an investor can place their bid.
• Placing of Bid: Investors can place their bids once the IPO is open for subscription. In a book-building issue, investors can place their bid at any price at which they want to apply for the IPO.|
• Analysing Investor Demand: Once the bidding period is closed, the demand for shares is analysed at different prices. This demand helps a company in understanding how investors are valuing the public issue.
• Finalising the Public Offering: Once the IPO is closed, its final price is decided, which becomes the public offering price.
• Shares Allotment: Once the IPO is closed, the shares are allotted to the investors who made eligible bids. The investors are allotted the shares for which they have applied.
• Listing of Shares: After the completion of the IPO allotment process, the shares are listed on different exchanges such as NSE and BSE. 

Example on Public Offering Price Work

Let’s understand how Public Offering Price work through an example:

A company named XYZ Limited decided to raise 1000 crore INR through an IPO. The primary objective of this issue is to repay debt and for business expansion. The company announced a price band of 200 to 220 INR per share. 

• Announcement of Price Band: The first step is that XYZ Limited sets an IPO price band of INR 200 to 220 per share. The investor can bid within this price band.
• Bid Placement by Investors: During this IPO period, the investors placed their bids, and suppose most of the investors placed bids at INR 220 per share.
• Deciding Price: The company analysed the bids and finalised the issue price at INR 220 per share.
• Allotment of Shares: Suppose an investor gets the allotment of 50 shares in the IPO. The investment amount will be INR 11,000.
• Listing of Shares: Now, suppose on the listing day the shares got listed for INR 240 per share. The investor’s notional gain would be 1000 INR. In this example, it indicates the Public Offering Price that an investor pays when they receive shares through an IPO.

How is the Public Offering Price determined?

The key factors that generally affect the Public Offering Price are determined in the following manner:

• Financial Performance of Company: The key step is to understand the financial performance of the company. The factors include revenue, profitability, growth, debt level, etc.
• Valuation of Company: The overall valuation of the company plays an important role in deciding the Public Offering Price. The valuation is compared with similar listed companies.
• Future Growth Potential: The Public Offering Price is influenced by the company’s future growth prospects. The factors include expected revenue growth, expansion plans, etc.
• Market Condition: The overall market condition can impact the public offering price. When the market has bullish sentiment, the company’s IPO will face higher demand and vice versa.

Read Also: Common IPO Investing Mistakes to Avoid Before Applying

Public Offering Price vs Market Price

The key difference between Public Offering Price and Market Price is as follows:

Basis of Difference	Public Offering Price	Market Price
Overview	It is the price at which shares are offered to the public through an issue.	It is considered the current price at which shares are traded on the stock exchange.
Application	Public offering price is applicable only during the IPO issue.	This is applicable once the shares are listed on the exchange.
Who Decides	This price level is decided through the applicable IPO pricing process.	It is determined by market demand and supply.
Movement in Price	The price is fixed once the final issue price is determined.	It fluctuates during a continuous trading session.
Objective	It is the price investors pay for allotted IPO shares.	It reflects the price at which buyers and sellers are currently willing to trade.

What should an investor check before applying for an IPO

The key things that an investor should check before applying for an IPO are as follows:

• Business Model: Understanding the business model of the company is essential before applying for an IPO. It includes understanding how a company makes money, its customers, etc.
• Financial Performance of Company: A company’s past performance plays a vital role in deciding the growth of the company. One should pay attention to revenue growth, profit margins, debt levels, etc.
• Evaluation of IPO Price: It is not necessary that if the company with a low IPO price has a cheaper valuation. It is advisable to compare the valuation of the company before making any investment decision.
• Peer Comparison: One should compare the company with its peers in terms of revenue, profitability, growth, etc.
• Objective of Fund Raising: One must find out why the company is raising money through an IPO, and the purpose of fund raising includes business expansion, working capital requirements, etc.

Conclusion

The Public Offering Price is an important part of any public issue by the company. It informs investors of the price at which shares are being offered to them. The public offering price gives you an idea about the company’s valuation and its future growth prospects. Various factors determine the public offering price, including its revenue, business model, etc. Before applying for an IPO, along with the public offering price, one must check other factors such as the objective of the issue, etc., as they can significantly impact the company’s performance. It is advisable to consult your investment advisor before making any investment decisions.  

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