Face Value

Face Value, also known as Par Value or Nominal Value, refers to the stated value of a financial instrument as printed or recorded on the certificate or document at the time of issuance. It represents the amount that the issuer promises to pay at maturity in the case of debt instruments or the base value of a share as determined by the company when it is first issued.
In essence, the face value is the original worth assigned to a security, which remains fixed and serves as the basis for calculating dividends, interest, and premiums or discounts during trading.

Definition

Face value is the legal value of a financial instrument, determined by the issuer and disclosed in official documents such as share certificates or bond indentures.

• For equity shares, it is the value per share decided by the company during incorporation or issue.
• For bonds and debentures, it is the amount that the issuer repays to the holder upon maturity.

While the face value remains constant, the market value of a security fluctuates according to demand, supply, and other economic factors.

Face Value in Different Financial Instruments

1. Equity Shares:

• The face value of a share is the base price assigned by a company when it issues shares.
• Common face values for shares in India are ₹1, ₹2, ₹5, or ₹10.
• Dividends are often declared as a percentage of face value. For example, a 50% dividend on a share with a face value of ₹10 means the shareholder receives ₹5 per share.

2. Bonds and Debentures:

• The face value of a bond or debenture is the amount the issuer agrees to repay at maturity.
• Interest (coupon rate) is calculated as a percentage of the face value.Example: A bond with a face value of ₹1,000 and a 6% coupon rate pays ₹60 annually as interest.

3. Preference Shares:

• Like equity, preference shares have a fixed face value, and dividends are paid as a percentage of that value.

4. Mutual Funds:

• In mutual funds, the face value is the initial price per unit (generally ₹10 in India) at which investors can buy units during the New Fund Offer (NFO).

Key Features of Face Value

• Fixed Value: It remains constant throughout the life of the security unless a company restructures or splits its shares.
• Basis for Calculation: Used for computing dividends, interest, and redemption value.
• Accounting Representation: Recorded on the company’s balance sheet as part of share capital or liability.
• Legal Importance: Represents the nominal obligation of the issuer toward investors.

Face Value vs. Market Value vs. Book Value

Thus, while face value is a static accounting figure, the market value reflects investor sentiment and market conditions, and the book value reflects a firm’s internal worth.

Role of Face Value in Corporate Actions

1. Stock Split: When a company divides its existing shares into multiple smaller shares to increase liquidity, the face value is reduced proportionally.
   • Example: If a company with shares of ₹10 face value splits them into two, the new face value becomes ₹5 per share.
2. Bonus Issue: Bonus shares are issued to existing shareholders free of cost, based on the face value and existing shareholding ratio.
3. Rights Issue: New shares offered to existing shareholders are priced based on or around the face value, adjusted for premium.
4. Share Premium: When a company issues shares at a price higher than the face value, the excess is called share premium.
   • Example: If a share with a face value of ₹10 is issued at ₹150, the premium is ₹140.

Importance of Face Value

• Determines Interest and Dividend Payments: For bonds and shares, returns are calculated as a percentage of the face value.
• Legal and Accounting Reference: It represents the minimum value recorded in a company’s balance sheet and provides a base for corporate accounting.
• Investor Understanding: Helps investors distinguish between nominal value and market price, giving clarity about pricing structure.
• Capital Formation: Total share capital of a company is calculated as the product of the number of shares and their face value.

Examples

1. Equity Example: A company issues 1 lakh shares with a face value of ₹10 each.
   • Total share capital = 1,00,000 × ₹10 = ₹10,00,000.
   • If the company declares a 30% dividend, each shareholder receives ₹3 per share.
2. Bond Example: A bond with a face value of ₹1,000 and an 8% coupon rate pays ₹80 annually as interest.
   • If the bond trades in the market at ₹950, it is said to be trading at a discount to face value.
   • If it trades at ₹1,050, it is trading at a premium.

Regulatory Framework

In India, the concept of face value is governed by:

• The Companies Act, 2013 – Defines share capital and its nominal value.
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 – Regulates issue pricing and disclosure requirements.
• Reserve Bank of India (RBI) Guidelines – Govern issuance of bonds and debt instruments.

Modern Context

With increasing market sophistication, the importance of face value has evolved:

• In secondary markets, face value has little bearing on trading prices, which are driven by market perception and financial performance.
• In primary issues, it remains relevant for accounting, dividend calculation, and legal compliance.
• Technological systems and dematerialisation have replaced physical certificates, but face value continues to serve as a foundational concept in securities valuation.