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GREENSHOE

OPTION

Prasita (85)

Aaditya (86)

Sagar (87)

A Price

Stabilization

Mechanism

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Definition

A green shoe is a clause contained in the

underwriting agreement of an initial (IPO)

that allows underwriters to buy up to an

additional 15% of company shares at the

offering price (of the total IPO size).

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What is it ?

Green shoe option means an option of allocatingshares in excess of the shares included in thepublic issue and operating a post listing price.

It is a provision, in underwriting agreement, thatallows the underwriter to sell the additionalshares than the original number of shares

offered.

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The term comes from the first company, Green

Shoe Manufacturing now called Stride Rite

Corporation, to permit underwriters to use this

practice in its offering.

stabilising agent means a merchant banker

who is responsible for stabilising the price of

equity shares under a green shoe option, in

terms of these regulations

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Origination

The term Green Shoe Option derived from aCompany named Green Shoe ManufacturingCompany, founded in 1919.

This company is now called as Stride Rite Corp.

This Company was the 1st who initiated this

option in 1960.

It is also known as GSO.

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Why GSO?

This would normally done to reduce the risk ofthe IPO (Initial Public offering).

Also, when the public demand for the sharesexceeds expectations and the stock tradesabove the offering price.

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Parties to Agreement

The Issuing Company

The Promoter

The Stabilizing Agent

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Objectives

The basic purpose of this option is to

operate a post-listing price Stability

mechanism i.e. to check the market pricefrom falling below the issue price.

The green shoe option is available only in

case of IPO and not for subsequent

issues.

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SEBI Guidelines

A pre-issue contract is required to be entered into for this purpose

with an existing shareholders.

Underwriter can issue 15% additional shares of the original offer

price.

Underwriter can exercise that option within 30 days from the date ofallotment of shares.

Shareholders approval of further allotment of shares to SA

(stabilizing agent).

One BR/LM (Book Runner or Lead Manager) to be appointed as SA.

Maximum shares that can be over-allotted is 15% of the issue size. Disclosures of specified details in offer document.

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Role of Stabilising Agent

One of the lead book runners is appointed as the

Stabilizing Agent (SA)

The prime responsibility of the SA shall be to stabilize

post listing price of the shares.

SA is given a fixed fee for its services.

The SA shall borrow shares from the promoters of the

company to the extent of the proposed over-allotment.

The SA shall determine the timing of buying the shares,the quantity to be bought, the price at which the shares

are to be bought etc. [clause 8A.14].

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Example

For example, if a company decides to publicly sell 1 lakhshares, the underwriters (or "stabilizers") can exercisetheir green shoe option and sell 1.15 lakh shares. Whenthe shares are priced and can be publicly traded, theunderwriters can buy back 15% of the shares. This

enables underwriters to stabilize fluctuating share pricesby increasing or decreasing the supply of sharesaccording to initial public demand.

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CONCLUSION

Risk Management Tool

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