IPO Boom: How a stock with an issue price of 200 lists at 500? Understanding how listing price is determined

Pranati Deva
Updated: 28 Dec 2021, 09:12 AM IST
TL;DR.

Sometimes a stock lists at a massive premium while sometimes at a discount to its issue price. Let’s understand what determines the listing price of a stock after an IPO

Let’s understand what determines the listing price of a stock after an IPO

Let’s understand what determines the listing price of a stock after an IPO

A number of times we hear a stock has been listed at a 100 percent premium. What does that mean? It basically means that the price at which the stock listed on the exchanges is double what it was offered during the IPO.

For example, Paras Defence and Space Technologies had an issue price of 175 listed at 475 on BSE, up over 170 percent from its issue price. Similarly, other IPOs like IRCTC, Happiest Minds Technologies, Avenue Supermarts, Salasar Techno Engineering, etc were also listed at over 100 percent premium.

While some IPOs list at massive premiums, there are other IPOs that do not perform as well as expected, and some even list below their issue price.

So let's understand how the listing price of an IPO is determined and why some perform well while others fail.

Starting with the basics, the listing price is the first price of the share at which it makes a market debut on the stock exchanges. Meanwhile, the offer price is the price band at which the shares of the firm are offered during the IPO.

It is a 3-day event where investors apply for the shares of the firm before it starts trading on the exchanges. The price of the shares during the IPO is already fixed. It is determined by investment banks assisting the firm during the IPO based on the fundamentals like balance sheet, earnings, valuations of the firm.

Based on the issue price, investors subscribe for the IPO. Many times, the subscription of a firm is high or more than the number of shares offered by the firm, then the issue is said to be oversubscribed. The subscription shows the demand for the IPO among investors. Subscription depends on a lot of factors including the issue price, fundamentals, valuation, etc.

For example, if the issue size of an IPO is 10 lakh shares there is demand for 1 crore shares then the IPO is oversubscribed by 10 times. Usually, oversubscription shows higher investor interest.

After the 3-day IPO when the shares are subscribed, the allotment of the shares takes place. After that, the stock is listed.

The listing price is determined by the demand and supply of the shares in the market. If the demand of the shares is more than its supply, the listing price is usually higher than the issue price and vice versa. But it is not always the case.

Listing price is arrived upon by a method called price discovery and decided by investment banks based on the supply and demand. A price is fixed depending on the buy and sell orders at which maximum trade can be executed.

Apart from demand and supply, the listing price can also be affected by market sentiment, current market conditions, grey market, etc.

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Top IPO listings

Before the stock is listed on the exchanges, it is traded in the grey market. The performance of the stock in the grey market also becomes an important parameter for the listing price. If the demand of the stock is good and the market sentiment is strongly in favour, the stock will have a higher grey market premium.

Also, the current market sentiment also affects the listing price of the stock. For example, in the case of SBI Cards, even though there was a lot of excitement for the IPO it was launched when the market sentiment was down due to COVID. Hence, the listing of the stock was weaker than anticipated.

Now that we understand what affects listing price, let's look at some of the top listings in the Indian stock market.

First Published: 28 Dec 2021, 09:12 AM IST
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