INDEX

Sr. No Particulars Page Number(s)

1. Introduction 2-6
2. SEBI Guidelines Related to Green Shoe Option 7-9
3. Articles 10-14
4. Supreme Court Case 15-17
5. Case Study 18-19
6. Limits to Green Shoe Option 20-25
7. Acknowledgement 26
8. Bibliography 27

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 INTRODUCTION
Green Shoe option means an option of allocating shares in excess of the shares
included in the public issue. Its main purpose is to stabilize post listing price of
the newly issued shares. It is being introduced in the Indian Capital Market in
the initial public offerings using book building method. It is expected to arrest
the speculative forces.

The basic purpose of ‘green shoe option’ is not to make available additional
share capital to company, but to act as stabilizing force, if issue is over
subscribed. The shares held by promoters are lent to Stabilising Agent (SA) and
returned by SA to them after the purpose is over. Promoters do not get any
profit in this transaction.

The green shoe option is available only in case of IPO and not for subsequent
issues.

"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 stabilizing
mechanism, which is granted to a company to be exercised through a
Stabilising Agent [clause 1.2.1(xiii-a)].

A company desirous of availing the option granted by this Chapter, shall in the
resolution of the general meeting authorizing the public issue, seek
authorization also for the possibility of allotment of further shares to the
‘stabilizing agent’ (SA) at the end of the stabilization period in terms of clause
8A.15. [clause 8A.1]

The company shall appoint one of the Lead book runners as the "stabilizing
agent" (SA), who will be responsible for the price stabilization process, if
required. The SA shall enter into an agreement with the issuer company
[clause 8A.2]

The SA shall also enter into an agreement with the promoters who will lend
their shares Maximum number of shares that may be borrowed from the
promoters shall not be in excess of 15% of the total issue size. [clause 8A.3].

The details of the agreements mentioned in clause 8A.2 (between Company

and SA) and 8A.3 (between SA and promoters) shall be disclosed in the draft
Red Herring prospectus, Red Herring prospectus and the final prospectus.

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The SA shall borrow shares from the promoters of the company to the extent
of the proposed over-allotment. These shares shall be in dematerialized form
only [Clause 8A.7]. The allocation of these shares shall be pro-rata to all the
applicants [clause 8A.8].

The stabilization mechanism shall be available for the period disclosed by the
company in the prospectus, which shall not exceed 30 days from the date
when trading permission was given by the exchanges [clause 8A.9].

The prime responsibility of the SA shall be to stabilize post listing price of the
shares. To this end, 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].

The idea is that due to excess supply of shares (permitted upto 15%), market
price will not shoot up at abnormally high level. However, if price of shares
goes below issue price, SA will buy share from the market, so that price rises. If
despite excess supply of shares, price continues to be higher than the issue
price, there is no question of buying the shares from market, as that will
further aggravate the market price.

On expiry of the stabilization period, in case the SA does not buy shares to the
extent of shares over-allotted by the company from the market, the issuer
company shall allot shares to the extent of the shortfall in dematerialized form.
[clause 8A.15].

The SA shall remit an amount equal to (further shares allotted by the issuer
company) * (issue price) to the issuer company from the GSO Bank Account.
The amount left in this account, if any, after this remittance and deduction of
expenses incurred by the SA for the stabilization mechanism, shall be
transferred to the investor protection fund(s) of the stock exchange(s). [clause
8A.17] - - Thus, promoters/company do not benefit from this transaction.

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Investopedia explains Greenshoe Option
Greenshoe options typically allow underwriters to sell up to 15% more
shares than the original number set by the issuer, if demand conditions
warrant such action. However, some issuers prefer not to include greenshoe
options in their underwriting agreements under certain circumstances, such as
if the issuer wants to fund a specific project with a fixed amount of cost and
does not want more capital than it originally sought.
The term is derived from the fact that the Green Shoe Company was the first
to issue this type of option.

Green shoe Option (GSO).

This is a post listing price stabilizing mechanism, by which the company intends
to ensure that the shares price on the Stock exchanges does not fall below the
issue price.
The term “Green shoe option” derived its name from the company in US which
excercised this mechanism for the first time.
The Securities and Exchange Board of India (SEBI) guidelines permit exercise of
the greenshoe option by a company making a public issue. A pre-issue contract
is required to be entered into for this purpose with an existing shareholder —
often one of the promoters. The guide lines require the promoter to lend his
shares to be used for price stabilisation to be carried out by a stabilising agent
on behalf of the company.
The stabilizing agent can be one of the lead book runner and the stabilization
period can be for a period of maximum period of 30 days from the date of
allotment of shares.
The company then goes on to make allotment, including over allotment, to the
extent it has exercised the greenshoe option, which term incidentally has its
origin in the name of a company that for the first time exercised such an option
in the US. The proceeds of the public issue to the extent it relates to such over-
subscription permitted by the greenshoe option is, however, kept in an escrow
account to be used in the price stabilisation exercise (explained clearly how
these funds are to be used).
Green shoe option is to be exercised in an IPO. The SEBI guideline requires the
promoters of the company to lend some shares (the maximum upper limit
being 15% of the total number of shares being issued through IPO) to the

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stabilizing agent whose duty is to monitor the post listing price of the
companies share in the stock exchange.
How Green shoe option works?
The entire process of a greenshoe option works on over-allotment of shares.
Say, for instance, that a company is planning to issue only 100,000 shares, but
in order to utilize the greenshoe option, it actually issues 115,000 shares, in
which case the over-allotment would be 15,000 shares. However the point
that the company does not issue any new shares for the over-allotment should
be noted.
The 15,000 shares used for the over-allotment are actually borrowed from the
promoters with whom the stabilizing agent enters into a separate agreement.
For the subscribers of a public issue, it makes no difference whether the
company is allotting shares out of the freshly issued 100,000 shares or from
the 15,000 shares borrowed from the promoters. Once allotted, a share is just
a share for an investor.
For the company, however, the situation is totally different. The money
received from the over-allotment is required to be kept in a separate bank
account (which is GSO bank Account) .
The main job of the stabilizing agent begins only after trading in the share
starts at the stock exchanges.
In case the shares are trading at a price lower than the offer price, the
stabilizing agent starts buying the shares by using the money lying in the
separate bank account. In this manner, by buying the shares when others are
selling, the stabilizing agent tries to put the brakes on falling prices. The shares
so bought from the market are handed over to the promoters from whom they
were borrowed.
In case the newly listed shares start trading at a price higher than the offer
price, the stabilizing agent does not buy any shares.
Then how would he return the shares? At this point, the company by exercising
the greenshoe option issues new shares to the stabilizing agent, which are in
turn handed over to the promoters from whom the shares were borrowed.
In case the newly listed shares start trading at a price higher than the offer
price, the stabilizing agent does not buy any shares.

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What is green shoe option in an IPO?
A 'green shoe option' in an IPO allows the issuing company to offer more
shares than the original prospectus amount if the deal is heavily
oversubscribed.
Its a provision contained in an underwriting agreement that gives the
underwriter the right to sell investors more shares than originally planned by
the issuer. This would normally be done if the demand for a security issue
proves higher than expected. Legally referred to as an over-allotment option.

A greenshoe option can provide additional price stability to a security issue

because the underwriter has the ability to increase supply and smooth out
price fluctuations if demand surges.

Example: A company files to sell 10 million shares in an IPO with a 10% green

show option; if the deal has large demand they have the option to issue an
additional 1 million shares (10% of the original 10 million).

Greenshoe options typically allow underwriters to sell up to 15% more shares

than the original number set by the issuer, if demand conditions warrant such
action. However, some issuers prefer not to include greenshoe options in their
underwriting agreements under certain circumstances, such as if the issuer
wants to fund a specific project with a fixed amount of cost and does not want
more capital than it originally sought.

The term is derived from the fact that the Green Shoe Company was the first
to issue this type of option. In India ICICI introduced this concept

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 SEBI GUIDELINES RELATED TO GREEN SHOE OPTION

GREEN SHOE OPTION denotes an option of allocation of shares, in excess of

shares included in the public issue. W.e.f 28.05.07, the concept of Green Shoe
option has been extended to all public issue in accordance with the provision
of chapter VIII A of SEBI Guidelines. SEBI introduced this option with a view to
boost investor’s confidence by arresting the speculative force, which work
immediately after listing and thus result in short term votality in post listing
price. It ensures price stability.
There are some guidelines related to Green Shoe option by Security &
Exchange Board of India.
 An issuer company making a public offer of equity shares can avail of
green shoe option for
--Stabilizing the post-listing price of its shares.
--Possibility of allotment for the shares to the stabilizing agent at the end of
stabilizing period
 A company shall appoint one of the merchant bankers from amongst the
issue management team, as a stabilizing agent who will be responsible
for the price stabilization process.
 The stabilizing agent (SA) shall enter into an agreement with the
promoters or pre-issue shareholders who will be lend their shares
specifying the max. no of shares shall not be in excess of 15% of total
issue size.
 The details of the agreement shall be disclosed in the draft prospectus,
draft red herring prospectus, red herring prospectus and final
prospectus.
 Lead Merchant bankers by constitutions with stabilizing agent, shall
determine the amount of shares to overalloted with public issue.
 The draft prospectus, draft red herring prospectus, red herring
prospectus and final prospectus shall contain following additional
disclosures:-
--Name of Stability agent.
--The max. no of shares proposed to be overalloted by company.
--The period for which the company propose to avail of the stabilizing
mechanism.

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--The max. increase in capital of company and the shareholding pattern, post
issue, is required to allot for the shares to the extent of over allotment in the
issue.
--The max amount of fund to be received by company in case of further
allotment and the use of these funds in final document to be filled with ROC.
 In the case of initial public offer by the unlisted company, the promoter
and the pre issue share holders or incase of listed company having
shareholding more than 5 % shares , may lend the shares subject to
provision of SEBI. The Stabilizing Agent shall borrow shares from the
promoters or pre issue share holding to extend of proposed over
allotment.
 The allocation of these shares shall be on pro rata basis.
 The stabilization mechanism shall be available for the period, which shall
not exceed 30 days from the date of trading permission, was given by
exchange(s).
 The SA shall open a special account with the bank to be called SPECIAL
ACCOUNT for GSO proceeds of ……..Company. For the money received
from applicants against over-allotments in GSO shall be kept in GSO
bank A/c for the purpose of buying shares from market during
stabilization period, credited to the GSO Demat A/c(shares brought from
markets by SA)
 The share brought from market and lying in GSO Demat A/c shall be
return to promoter immediately in any case not later than 2 working
days after the close of the stabilization period.
 The Prime-responsibility of SA shall be stabilizing post-listing price of
share. The SA shall determine the timing of buying the shares, quantity
to be brought and the prices at which the shares are to be brought.
 On the expiry of stabilization period, in case of SA does not buy shares,
the issuer company shall allot shares to the extend of shortfalls in
dematerialization form to GSO Demat A/c with in 5 days of closer of
Stabilization period.
 The shares returned to promoter shall be subject to remaining lock in
period as applicable to promoters holding.
 The SA shall remit an amount equal to issuer company from GSO Bank
A/c. The amount left in this account shall be transferred to investor’s
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 protection fund.
 The SA shall submit a report to stock exchange on daily basis during the
stabilization period. The SA shall also submit a final report to SEBI in
specified format. The SA and the company shall sign this report
 The SA shall maintain the register in respect of each issue and must
retained for the period at least 3 years from the date of end of
stabilization period. The register contains
Each transaction effective.
Details of Promoters from whom the shares are to be brought.
Details of allotments.

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 ARTICLES
Article -1
16 AUG, 2010, 03.56AM IST,ET BUREAU 
Greenshoe option makes AgBank IPO the biggest

SHANGHAI: Agricultural Bank of China , or AgBank, boosted the size of its initial
public offering to $22.1 billion after selling more stock in Shanghai, making it
the world’s largest first-time share sale. 
China’s biggest lender by customers said on Sunday it had fully exercised an
over-allotment option, also known as a greenshoe, for the Shanghai portion of
its initial public offering, selling a further 3.34 billion shares at the IPO price of
2.68 yuan apiece. That increased the Shanghai portion of the lender’s IPO to
67.6 billion yuan ($9.9 billion). 
Over-allotments are released when demand for the shares in the after-market
is heavy. Underwriters release the shares, set aside at the original IPO price, to
the allocated holders who then become public stockholders. 
AgBank had already exercised a similar option for its Hong Kong portion last
month. The exercise of the over-allotment brings the number of shares sold in
AgBank’s Hong Kong and Shanghai offerings to 54.79 billion, increasing the
original $19.3 billion raised by 15%. 
The expansion propels AgBank’s IPO past Industrial and Commercial Bank of
China’s $21.9 billion sale in 2006 to become the world’s largest. The bank
raised $20.8 billion selling shares in Hong Kong and Shanghai last month as
chairman Xiang Junbo braved a stock-market rout that drove the Chinese
benchmark index to a 15-month low. 
AgBank has declined 0.4% since its July 15 debut in Shanghai, while in Hong
Kong, where the stock started trading a day later, the shares have advanced
3.7%. Domestic investors in China ordered more than 10 times the stock
available to them. 

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The Beijing-based lender is the last major Chinese bank to sell shares to the
public, wrapping up a decade-long overhaul of the nation’s banking industry
that cost the government an estimated $650 billion in bailouts and
restructuring programmes. 
China’s five biggest banks intend to raise a total of $63 billion this year by
selling bonds and shares to replenish capital eroded by a record $1.4 trillion of
new loans last year. 

Rural Roots 

The IPO of AgBank, once the weakest lender in China, makes the nation home
to four of the world’s 10 biggest banks by market value, half a decade after the
country’s first major state-owned lender went public. 
The lender, established to serve the country’s farmers and less affluent rural
areas, boosted profit by 26% to 65 billion yuan last year, and forecasts net
income will rise to at least 82.9 billion yuan in 2010, according to its
prospectus. China’s economic growth slowed to 10.3% in the second quarter
from 11.9% in the previous three months. 
China International Capital, Citic Securities, China Galaxy Securities and Guotai
Junan Securities are managing the yuan-denominated A-share offer.

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ARTICLE - 2
Real estate players opt for green shoe option in IPOs
By Vikas Srivastav Oct 01 2009 , Mumbai

Tags: Sahara, Real Estate, Commercial Properties, Land

Most realty companies planning to raise funds from the primary market have
opted for green shoe option in their initial public offerings (IPOs) to stem
volatility in share prices following their listing on the exchanges.

Companies such as Sahara Prime City, DB Realty, Lodha Developers and

Ambience have opted for the green shoe option, which will help them stabilise
share prices in the event of extreme volatility or prices moving below offer
price.

The green shoe option allows companies to intervene in the market to stabilise
share prices during the 30-day stabilisation period immediately after listing.
This involves purchase of equity shares from the market by the company-
appointed agent in case the shares fall below issue price.

In its draft red herring prospectus (DRHP) filing with stock market regulator
Sebi, Sahara Prime City said JM Financial has agreed to act as ‘the stabilising
agent’ for the purpose of effecting the green shoe option, as envisaged under
Sebi regulations.

“Equity shares available for allocation under the option will be available for
allocation to qualified institutional buyers (QIBs), non-institutional buyers and
retail individual bidders in the ratio of 60:10:30, assuming there is full demand
in each category,” the note said.

According to Citigroup director Vikas Khattar, the underwriting agreement of

an IPO allows underwriters to buy back up to an additional 15 per cent of
company shares at the offer price if the shares fall. “By stabilising the shares at
the issue price, companies give an assurance to investors. The underwriters
buy back shares from the market, thereby stabilising both the price and
investor sentiment on the counter,” he adds.

Ambience, which is primarily focused on development of premium commercial

and luxury residential complexes in the national capital region, is planning an
IPO to raise around Rs 1,125 crore with a green shoe option of up to Rs 168.75

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crore. While DB Realty plans to raise Rs 1,500 crore with a green shoe option
of 10 per cent, Sahara Prime city has marked around 15 per cent under the
green shoe option from its total issue size.

Lodha Developers has decided to go for 10 per cent green shoe option, which
will amount to around Rs 280 crore with the issue size pegged at around Rs
2,800 crore.

According to VVLN Sastry, head of research at Firstcall India Equity, companies

go for this option for two reasons — one, lack of confidence of full subscription
of shares in an IPO or FPO, and two, to scale down an IPO size and retain the
over-subscription amount.

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ARTICLE - 3
LIC Housing Finance raises Rs 750 crore through bond issue
Published: Thursday, Dec 9, 2010, 18:57 IST 
Place: Mumbai | Agency: PTI
Even as tight liquidity conditions continue in the system, LIC Housing Finance
today said it has raised Rs750 crore through a bond issue at a competitive rate.

The amount raised is over three times its intended issue size and at a rate of
9.4%, the company said in a release adding the bonds will have a tenure of two
years.

The rate is within the prevailing one-year bank certificate of deposits

(CD)/commercial paper (CP) rates of 9.2-9.5%, the Mumbai-headquartered
company said.

The original issue size was Rs200 crore and also had a green-shoe option,
allowing it to retain over subscriptions, it said.

"The bond issue got a good response from institutional investors from Indian
and foreign banks, mutual funds and insurance companies," the company said.

The company was in involved in a controversy recently because of the arrest of

its chief executive in a bribe-for-loans case involving some middlemen and
borrowings by some realty companies. RR Nair, the tainted CEO has since been
replaced by VK Sharma.

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 SUPREME COURT CASE

Greenshoe Option Declared Void

For the first time, the overallotment (Greenshoe) option granted by a German
stock corporations Law to consortium leaders in an initial public offering (IPO)
has been reviewed by a German court. The overallotment option was declared
void because the Greenshoe tranche was issued to the consortium leader at
the initial offering price instead of the current, higher, stock market price.
An Ordinary Case
In accordance with common procedure, the consortium leader in this IPO had
sold and allotted not only the new shares to be placed, but also an additional
15% of shares which had been lent from shareholders. The stock exchange
quotation went up during the 30 days following the IPO. It was, therefore, not
necessary for the consortium leader to repurchase shares in order to stabilize
the quotation. In order to return the lent shares to the lending shareholders,
the consortium leader had to exercise the overallotment option to acquire the
shares from the corporation (so-called 'Greenshoe tranche'). The corporation
granted this option to the consortium leader after the shareholders general
meeting had created approved capital and had authorized the board of
management to exclude the subscription rights on issuance of new shares for
the placement volume, as well as for the Greenshoe shares. The management
board was given authority to decide on the details of the issuance of the
Greenshoe shares. Accordingly, the management board increased the capital,
excluded the subscription right on the issuance of new shares and issued the
shares to the consortium leader at the initial offering price. Thus, the
consortium leader was put in the position of returning the received shares to
the lending shareholders.
An Extraordinary Judgment
A minority shareholder filed suit against the issuance of the Greenshoe tranche
to the consortium leader at the initial offering price. The claimant challenged
the underlying shareholders' resolution which had created approved capital for
the Greenshoe tranche and authorized the board of management to
determine the details of issuance. In its ruling, the Berlin Court of Appeal
confirmed long-standing decisions that the general meeting of shareholders is
allowed to authorize the management board to determine the amount at
which shares are being issued. Nevertheless, the Court of Appeal assented to

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the claimant's view. It held that the issuance of Greenshoe shares at the initial
offering price, and lower than the current stock exchange price, was
inadmissible. The court held that the shareholders excluded from the
subscription right would have to be protected against a dilution of equity. It
concluded that the management board should only be entitled to issue the
Greenshoe shares with the overallotment option at a fair and reasonable price,
and that this price should be determined according to the stock market price.

Criticisms
Out of court, the Berlin Court of Appeal's decision was unanimously rejected.
Commentators oppose the decision on the grounds that the general meeting
of shareholders was allowed to create approved capital with the possibility of
excluding the subscription rights on the issuance of new shares. It was not
required that the general meeting of shareholders determine an initial offering
price or a minimum value at which the shares had to be issued. For this reason,
the managing board was entitled to decide on the details of issuance of the
Greenshoe tranche. Admittedly, the managing board is required to demand a
fair and reasonable price for issued shares originating from a capital increase
under exclusion of subscription rights. However, the initial offering price is
regarded as fair and reasonable in this respect. It is argued that the managing
board would also have been entitled to use the whole approved capital,
including the Greenshoe tranche, for the IPO, to issue all the shares and to
demand the initial offering price calculated on the basis of the book-building
method. This procedure would not have infringed upon the rights of the
shareholders, since an advantage arises only for the original subscribers who
receive shares through the overallotment, and not for the consortium leader
or for the shareholders who had lent shares. The advantage of an
overallotment is the increment of capitalization, which is fully consistent with
the interests of all shareholders.
The Berlin Court of Appeal failed to take into account whether the consortium
leader had actually placed all lent shares together with the other shares at the
initial offering price. In the proceedings, the minority shareholder claimed that
the consortium leader only sold the lent shares to original subscribers later,
when the price had increased, and at a price that was higher than the initial
offering price. If this were true, the case may have called for a different
judgment.

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Comment
The German Federal Supreme Court in Karlsruhe is now reviewing the decision
of the Berlin Court of Appeal. If the decision is found to be consistent with
German law, minority shareholders could demand the issuance of the
Greenshoe tranche at the current stock exchange quotation, even if the
management board is entitled to determine the issuance price. The consortium
leader, who only received the placement price at the issuance, would, as a
result, suffer a loss due to the current higher market price. For that reason,
consortium leaders in Germany could only lend shares from shareholders and
stipulate a purchase option should a correction of the market price prove
unnecessary. In this case, it remains clear that the consortium leader must pay
the initial offering price to the lending shareholders.

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 CASE STUDY

The Securities and Exchange Board of India (Sebi) is set to release the revised
guidelines for initial public offerings (IPOs) on book-built basis, by adding key
features, including green shoe option.
The green shoe option, which can also be termed as the price stabilising
mechanism, will be made available to issuers after the revised guidelines for
IPOs are put in place. These guidelines will bring the Indian primary markets on
par with global markets such as US, Canada and others where over 90 per cent
of primary issues is through the book-building route having the green shoe
option.
Along with the introduction of this option, the revised guidelines will also
include features like moving price band, change in the definition of the retail
investor, change in the bucket size, sops for qualified institutional buyers
(QIBs) and allotment of shares in six days from the closure of IPO.
The green shoe option is expected to work as price stabilisation mechanism
post public issue and address the chronic problem of price volatility which is
witnessed immediately after the listing of the security takes place.
The Sebi move to introduce the green shoe option will be significant
considering that the primary market is expected to witness heightened activity.
According to rough estimates, about Rs 30,000 crore is expected to be raised
from the primary market before the end of the current financial year.
In the last 18 months or so, about three big IPOs have hit the market through
the 100 per cent book-built route. Though these stocks may be currently
trading at a premium, IPO investors in companies like Bharat-Tele and i-flex
had a tough time post-IPO in the absence of green shoe option.
Merchant bankers are upbeat about the development and said that the
apprehension of IPO investors during the time of listing can easily be overcome
by the introduction of this option.

Ravi Kapoor, senior vice-president, DSP Merrill Lynch, said, “The amount raised
in the form of green shoe option will be used to stabilise the price of the stock
post-listing, raising comfort levels of investors (that price would be stabilised
post listing) and encouraging increased participation from investors.”
Another merchant banker, while welcoming the Sebi move, said, “Some
analysis of the developed markets have shown that investors tend to give a
little higher price if they are assured that book-runners have the green shoe
option at their disposal to stabilise the price.”

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For example, in case of i-flex Solutions, the IPO was priced at Rs 530, at a time
when IT company happened to be the least prefered stock on the bourses.
Though the stock is currently trading more than double its issue price, it stayed
below its issue price for more than two months post-listing.

In this case, if i-flex had opted for green shoe, than the underwriter would
have stabilisted the stock price by purchasing excess supply from the market,
thereby helping the stock performance and stabilise close to the offer price
during that critical period.

One of the major beneficiaries of the green shoe option happens to be the
investor as this option helps to preserve his capital as buying of excess shares
limits panic selling in the market, as and when the stock gets listed on the
bourses.

This is how the price stabilisation mechanism will work for the book-built IPOs.

Step 1: Assume that the company wants to issue 100 shares and the price
discovered through the book-builiding mechanism is Rs 10 per share. The
company has also made a provision of 15 per cent green shoe option to the
underwriters of the issue. This means, at the discretion of underwriters the
company will further issue 15 shares at the same price of Rs 10 to the specific
underwriter, who, in turn, will act as the stabilisation agent (SA) for the issue.
The option is valid only for a period of one month post listing of the IPO. The
amount raised by selling these 15 shares will be in the escrow account, to
which the underwriter has the access.

Step 2: On the closure of IPO, the underwriter issues 115 shares (minimum IPO
size 100 shares). The shares can be a loan from the promoter or any existing
shareholder of the company.

Step 3: Post listing, if the stock price goes up, the SA is not required to stabilise
the price and will excercise the green shoe option, whereby the company will
issue further 15 shares to the underwriter and collect money for the same at
the book-build price (offer price).

In case the stock price goes down below the issue price post-listing, then the
underwriter uses the money from the escrow account up to the extent of 15
shares to buy shares from the secondary market and the issue size remains at
100 shares. The underwriter, in this case, returns the 15 shares to the lender.

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 Limits to green shoe option

S.MURLIDHARAN -
“It can be ineffective in holding up share prices when the chips are down.
Instead, small investors should be allowed to sell to promoters at the offer
price, within six months of listing.”

The Securities and Exchange Board of India has permitted companies in India
to make use of the green shoe option (GSO) in their IPOs; now, they can make
over-allotment of shares subject to a ceiling of 15 per cent of the issue size.

If the issue size is one lakh shares, post price stabilisation the company could
end up with an allotment of 1.15 lakh shares if it were to exercise the option to
the hilt.

The supporters of GSO argue that extra funds mobilisation is only an incidental
aspect; the overarching objective is to guard the price line.

HOW GSO WORKS

A company using GSO appoints a Stabilising Agent (SA) as one of the book
runners, to whom the over-allotment money is made available for price
stabilisation during the stipulated 30 days from the date of listing.

In other words, the company does not credit the proceeds of over-allotment to
its share capital account, nor does it allow its bank balance to swell to this
extent.

For example, if the issue price is Rs 500 per share, the company would have
collected Rs 5.75 crore but will and scrupulously keep Rs 75 lakh in an escrow
account to be operated by the SA.

Much before the issue process starts, the SA, the lynchpin of the whole
operation, loses no time in borrowing shares from promoters and others from
of their pre-public issue holdings. The extra shares issued in the IPO of 15,000
shares are not a part of the IPO process, nor can they be termed as an offer of
shares. In an offer of sale, the proceeds are handed over to the one exiting
from the company.

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Under GSO, however, the promoter is only loaning the shares. When the
shares get listed and quotations start coming in, the SA would keep an eagle
eye on the market. He would not bestir if the quotations are way above the
offer price which in a way is a message to the company that the market can
absorb more of its shares.

At the expiry of the stabilisation period, that is, the 30 days during which the
price line has been guarded, it is exit time for the SA, but not before he has
handed back the shares he had borrowed.

The company now would exercise the over-allotment option by allotting

15,000 shares to the SA who would pay for them from the escrow account and
post-haste hand back the shares to the promoters who loaned them to him.

Shares, like currency, are fungible, more so in a demat milieu; therefore, it

makes very little difference whether the returned shares are same or fresh,
just as the beneficiaries of over-allotment do not even know, much less mind,
that what they are getting are actually the existing shares loaned by the
promoters and not the fresh ones in an IPO.

In case the SA is constrained to buy to guard the price line, the company would
be obliged to make use of the over-allotment option only to the extent of
shortfall.

In the above example, suppose the SA has bought 10,000 shares from the
market to ratchet up quotations by creating an artificial demand, the company
will have to now allot only 5,000 shares to the SA. And in case, the SA buys the
entire 15,000 shares from the market itself, he won't bother the company for
over-allotment---the market purchases would be sufficient to pay back the
loan in kind.

Profit, if any, made at the end after paying the company for allotment and
considering the SA's fees and other expenses, has to be made over to the
Investor Protection Fund of the Stock Exchange where the shares are listed.

PROBLEM AREAS

Market fundamentalists rave and rant about the beauty of GSO, little realising
that the shoe pinches. When the market is in robust health and its mood
buoyant, it ends up pumping in more money into company's coffers, though

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some company’s intent on capping their capital may not be unduly enamoured
of the additional capital pouring in.

But if the offer price is excessive, or when suddenly the chips are down, the SA
swings into action to bolster the sagging confidence and quotation. But for
how long? What if the depression is not temporary but long lasting? What if
successive bouts of aggressive buying meet with resistance resulting in wasted
efforts?

Savvy market operators are not fooled by the looming presence of the SA. In
short, the entire effort of the SA is synthetic. Is the effort worth the trouble?
When the SA buys the shares from market, he is in a way stepping in for the
company to mop up the extra shares, akin to buyback of shares.

The only difference between buyback and SA mopping up operations is while

on buyback the shares bought back have to be extinguished and cancelled, the
shares bought by the SA are meant to be returned to their lenders. The
common thread of both the exercises, though, is to choke the supply to bolster
the price.

SEBI'S EXISTING FORMULA

If SEBI is really serious about protecting small investors, it should jettison the
transient, illusory and potentially impotent GSO in favour of a remedy that is
already there in its arsenal.

It should make its optional safety net mechanism mandatory which would
enable a small investor to sell up to 1,000 shares to promoters and merchant
bankers at the offer price, should the market dip below it during the six
months following listing. That no company has stuck its neck out to offer it is
proof of its potential effect on financial greed. Companies would go slow on
rapacious premiums in the sobering realisation that their promoters could be
held accountable by small investors. It is easy to guard the price line using a
company's resources, but using one's own for the same purpose calls for
enormous courage and confidence.

Companies that want to venture out and start selling their shares to the public
have ways to stabilize their initial share prices. One of these ways is through a
legal mechanism called thegreenshoe option. A greenshoe is a clause
contained in the underwriting agreement of an initial (IPO) that

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allows underwriters to buy up to an additional 15% of company shares at the
offering price. The investment banks and brokerage agencies (the
underwriters) that take part in the greenshoe process have the ability to
exercise this option if public demand for the shares exceeds expectations and
the stock trades above the offering price. (Read more about IPO ownership
in IPO Lock-Ups Stop Insider Selling.)

The Origin of the Greenshoe

The term "greenshoe" came from the Green Shoe Manufacturing Company
(now called Stride Rite Corporation), founded in 1919. It was the first company
to implement the greenshoe clause into their underwriting agreement. 

In a company prospectus, the legal term for the greenshoe is "over-allotment

option", because in addition to the shares originally offered, shares are set
aside for underwriters. This type of option is the only means permitted by the
Securities (SEC) for an underwriter to legally stabilize the price of a
new issue after the offering price has been determined. The SEC introduced
this option in order to enhance the efficiency and competitiveness of the
fundraising process for IPOs. (Read more about how the SEC protects investors
in Policing the Securities Market: An Overview of the SEC.)

Price Stabilization
this is how a greenshoe option works: 
 The underwriter works as a liaison (like a dealer), finding buyers for the
shares that their client is offering.
 A price for the shares is determined by the sellers (company owners and
directors) and the buyers (underwriters and clients).
 When the price is determined, the shares are ready to publicly trade.
The underwriter has to ensure that these shares do not trade below the
offering price.
 If the underwriter finds there is a possibility of the shares trading below
the offering price, they can exercise the greenshoe option.
In order to keep the price under control, the underwriter oversells or shorts up
to 15% more shares than initially offered by the company. (For more on the
role of an underwriter in securities valuation, read Brokerage Functions:
Underwriting and Agency Roles.)

For example, if a company decides to publicly sell 1 million shares, the

underwriters (or "stabilizers") can exercise their greenshoe option and sell 1.15
million shares. When the shares are priced and can be publicly traded, the
underwriters can buy back 15% of the shares. This enables underwriters to

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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 greenshoe option is useful: it allows the
underwriters to buy back the shares at the offering price, thus protecting them
from the loss. 
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 (issuer). 

Full, Partial and Reverse Greenshoes

The number of shares the underwriter buys back determines if they will
exercise a partial greenshoe or a full greenshoe. A partial greenshoe is when
underwriters are only able to buy back some shares before the price of the
shares increases. A full greenshoe occurs when they are unable to buy back
any shares before the price goes higher. At this point, the underwriter needs
to exercise the full option and buy at the offering price. The option can be
exercised any time throughout the first 30 days of IPO trading.

There is also the reverse greenshoe option. This option has the same effect on
the price of the shares as the regular greenshoe option, but instead of buying
the shares, the underwriter is allowed to sell shares back to the issuer. If the
share price falls below the offering price, the underwriter can buy shares in the
open market and sell them back to the issuer. (Learn about the factors
affecting stock prices in Breaking Down The Fed Model and Forces That Move
Stock Prices.)

The Greenshoe Option in Action

It is very common for companies to offer the greenshoe option in their
underwriting agreement. For example, the Esso unit of Exxon Mobil
Corporation (NYSE:XOM) sold an additional 84.58 million shares during its
initial public offering, because investors placed orders to buy 475.5 million
shares when Esso had initially offered only 161.9 million shares. The company
took this step because the demand surpassed their share supply by two-times
the initial amount. 

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Another example is the Tata Steel Company, which was able to raise $150
million by selling additional securities through the greenshoe option.  

Conclusion
One of the benefits of using the greenshoe is its 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.

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ACKNOWLEDGEMENT

We would like to thank our Business Law Professor, Mrs. Jaya Manglani, for
giving us the Green Shoe Option as our project topic to research upon. The
Green Shoe Option is a concept of which we had negligible knowledge as
compared to how much there actually is to it and it proved to be a very
absorbing topic. We really have expanded our horizon on the concept of GSO
and the articles, the SEBI guidelines and cases have given us a better
understanding and more knowledge on the concept. It truly was an
enlightening and interesting experience and we would like to thank the
professor for the same.

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BIBLIOGRAPHY

 www.investopedia.com
 www.wikipedia.org
 www.caclubindia.com

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