Meaning and Definition:
When
a company wishes to raise share capital it breaks down sum into a number of
small sized units to make it affordable for people to buy or subscribe for the
shares. This basic, broken down, unit value of a share is called its face
value. It is also called the nominal
value of the share.
In
India it is common for companies to keep the face value of the share at Rs.10
and letter as the company grows and the market price of the share becomes very
large, the face value is split into smaller sizes of Rs.5 or 1.
Example:
ABC Ltd.
is planning to raise Rs.1000 crores (one crore is ten million) to set up a
hydroelectric project. It has decided to break down the capital into Rs.10 a
unit so that general public can easily buy. In this case ABC Ltd. will issue
100 crore shares of Rs.10 each. This Rs.10 is the face value of the share.
|
Description
|
Unit
|
Quantity
|
|
Face Value of Share
|
Rs. per share
|
10
|
|
Number of shares issued
|
Number in crores
|
100
|
|
Total Capital Raised
|
Rs. in crores
|
1000
|
Practically
shares are issued at a premium or discount to the face value and actually in
this context the word face value becomes significant.
Example:
Let
us assume that ABC Ltd. is already operating many hydroelectric projects
successfully and its shares are already listed on stock exchanges and trading
at Rs.900 apiece. Let us also assume that it is intending to raise the fresh
capital for expansion and has decided to issue the share at Rs.800.
|
Description
|
Unit
|
Quantity
|
|
Market Price
|
Rs. per share
|
900
|
|
Issue Price
|
Rs. per share
|
800
|
|
Premium
|
Rs. per share
|
790
|
|
Face Value of Share
|
Rs. per share
|
10
|
|
Number of shares issued
|
Number in crores
|
1.25
|
|
Total Capital Raised
|
Rs. in crores
|
1000
|
A similar treatment is given if the shares are issued at a
discount.
Example:
Let
us assume that ABC Ltd. is a large government company already operating many
hydroelectric projects and is the market leader but has been ailing and in
losses but undertaking a major restructuring with the government help and its
shares are already listed on stock exchanges and trading at Rs.9 apiece. Let us
also assume that it is intending to raise the fresh capital for expansion and
has decided to issue the share at Rs.8. The market believes that ABC Ltd. is
going to make successfully restructure its operations and become a very
successful and dominant player in the next five years and it’s share price is
expected to grow to Rs.40 apiece by then.
|
Description
|
Unit
|
Quantity
|
|
Market Price
|
Rs. per share
|
9
|
|
Issue Price
|
Rs. per share
|
8
|
|
Discount
|
Rs. per share
|
2
|
|
Face Value of Share
|
Rs. per share
|
10
|
|
Number of shares issued
|
Number in crores
|
125
|
|
Total Capital Raised
|
Rs. in crores
|
1000
|
Conclusion:
The
face value or nominal value of a share is the basic amount into which the
capital of the company is divided irrespective of at what price the share may
actually be sold. In India normally the face value is kept at Rs.10 and
afterwards split into smaller denominations.
