Explained | How is listing price of an IPO decided?

The listing takes place after the three-day IPO, when investors subscribe for the shares.

The Zomato initial public offering (IPO) opened on July 14, being subscribed 1.05 times on the first day.

Retail investors subscribed 2.69 times, while non-institutional investors have put in bids for 13 percent against their reserved portion.

The offer price range has been set at Rs 72-76 per share, and the last date of the IPO is July 16. The listing price is expected to be finalised on July 22 and Zomato's shares are expected to start trading on July 27.

Check live updates on the Zomato IPO here

But how exactly is the listing price of an IPO decided? 

Listing price refers to the opening price of the share when it first makes a debut on the stock exchange. The listing takes place after the three-day IPO when investors subscribe for the shares. The allocation of shares takes place after the IPO.

It must be noted that the listing price is different from the offer price, which is decided by the investment bank that is assisting the company with the IPO.

The listing price is decided based on market demand and supply of the shares and aims to strike a balance between the two.

The listing price is arrived at based on all the orders received for the shares and with the idea of maximising the number of trades that can be executed when the stock debuts.  This process is called price discovery.

If the demand for the shares exceeds the supply, then the listing price is typically higher than the offer price, and vice-versa.

If the demand for the shares is higher than the number of shares offered, the issue is said to be oversubscribed. The reverse is called undersubscription when the interest in the shares is insufficient.

The shares are listed at a cut-off price premium, par, or discount.

Also read: Explained | The journey of an IPO—from naming merchant bankers to listing on bourses