A Price

GREEN Stabilization
SHOE Mechanism
OPTION
FORAM SHAH
ROLL NUMBER : 50

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).

What is it ?
Green shoe option means an option of allocating
shares in excess of the shares included in the
public issue and operating a post listing price.
It is a provision, in underwriting agreement, that
allows the underwriter to sell the additional
shares then the original number of shares
offered.

Origination
The term Green Shoe Option derived from a
Company named Green Shoe Manufacturing
Company, 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.

Why GSO?
This would normally done to reduce the risk of
the IPO (Initial Public offering).
Also, when the public demand for the shares
exceeds expectations and the stock trades
above the offering price.
It is mainly practiced in US and European
Market.

Objectives
Price stability.
Reduce the risk.

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 of allotment of shares.

Requirements

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.

Stabilization mechanism available for 30 days after trading starts.

Shares to be transferred to lender (s)not later than 2 working days

after stabilizing period subject to the remaining lock-in.

SA to file daily and final report to SEs / SEBI.

Working Mechanism

Shares up to 15% of issue size allotted as a part of IPO.

Money received on over allotment is deposited in GSO Bank A/C.

Promoters / Pre-issue shareholders holding more than 5% shares

may lend their shares (Credited to GSO Demat a/c).

SA purchases shares from the market, if market price falls below the
issue price.

Shares are transferred to lender(s); balance shares, if any, are

issued to lender(s).

Balance in GSO Bank A/C is transferred to IEPF of DSE.

Example
For example, if a company decides to publicly sell 1 lakh
shares, the underwriters (or "stabilizers") can exercise
their green shoe option and sell 1.15 lakh shares. When
the shares are priced and can be publicly traded, the
underwriters can buy back 15% of the shares. This
enables underwriters to stabilize fluctuating share prices
by increasing or decreasing the supply of shares
according to initial public demand.
If the market price of the shares exceeds the offering
price that is originally set before trading, the underwriters
could not buy back the shares without incurring a loss.
This is where the green shoe option is useful: it allows
the underwriters to buy back the shares at the offering
price, thus protecting them from the loss.

Continued..
If a public offering trades below the offering price of the
company, it is referred to as a "break issue". This can
create the assumption that the stock being offered might
be unreliable, which can push investors to either sell the
shares they already bought or refrain from buying more.
To stabilize share prices in this case, the underwriters
exercise their option and buy back the shares at the
offering price and return the shares to the lender.

Conclusion
The green shoe has the ability to reduce risk for the
company issuing the shares. It allows the underwriter to
have buying power in order to cover their short position
when a stock price falls, without the risk of having to buy
stock if the price rises. In return, this helps keep the
share price stable, which positively affects both the
issuers and investors.

Bibliography
SEBI DIP Guidelines
SEBI Website

THANK YOU