IPO: Who decides the share price? The bank merchant or the company?

Stocks IPOs
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IPO: Who decides the share price? The bank merchant or the company?
Many people say the valuation of the IPO is high or low, but who decides the share price? the company itself?

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I think, the institution which is assigned the job of valuing the business comes up with valuations, in US this is done by the investment banks, or the financial institutions which have provided guarantee, and the owners can be a part of this valuation, and the owners have a say in the valuation process, I don’t know if this is exactly happens in India too.

A company need not profitable to go public, because as future is more important than the past, it is the future cash flows that decide the current valuation.

I have just some rough idea.

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Thanks. I have the same understanding but why do the merchant/ investment banks set high valuations for any company? for example, mamaearth IPO.

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Not sure, but I think in US, it seems the underwriting bank which provides guarantee and does the valuation work is allotted some shares, hence the higher valuation which serves in their own interest too.

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Well, both the merchant bank & the issuing company work together to come up with the final price band.

In an ideal scenario, the company would want to be valued as highly as possible - irrespective of whether new shares are being issued or existing shareholders are selling. At the same time, the merchant banker would want to ensure that the IPO is completely subscribed (and maybe even oversubscribed) since this speaks directly to their ability to sell an issue.

Unlike the company though, the merchant banker has to run a more delicate balancing act. Even though it’s in their interest to keep the pricing attractive, a merchant banker is paid in percentage terms of the IPO. So, the higher the valuation, the larger the pay can be. If the price is too high, the merchant banker runs the risk of having to buy a stake in the company since they compulsorily underwrite a part of it, or the IPO may outright fail.

The final price band of the IPO is formulated with the following considerations:

  1. Likelihood of selling the IPO at the given price.
  2. Value left on the table for incoming investors.
  3. Risk-reward for the company & merchant bank if the price band is increased/lowered.
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Now These doubts are arising, due to Paytm, Mamaearth …

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