Green shoe option allows companies to intervene in the market to stabilise share prices during the 30-day stabilisation period immediately after listing
Most of us who invest in stocks of a company know what is an IPO (initial public offering). An IPO is the first sale of a stock or share by a company to the public. Companies offering an IPO are sometimes new, young companies, or companies which have been around for many years and have finally decided to go public.
Before investing in an IPO, we go through the offer document of the company to know more about it. A listed company is legally bound to abide by commitments made in the document. Besides providing information about the company's competitive strengths, industry regulation, corporate structure, main objects, subsidiary details, risk factors, etc, the offer document also mentions a technical word called “Green shoe option”.
Let try to understand what does green shoe option mean.
Over-allotment option
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 US Securities and Exchange Commission (SEC) for an underwriter to legally stabilise the price of a new issue after the offering price has been determined. The SEC introduced this option to enhance the efficiency and competitiveness of the fund raising process for IPOs.
Green shoe option in India
Green shoe options or over-allotment options were introduced by the Securities and Exchange Board of India (SEBI) in 2003 to stabilise the aftermarket price of shares issued in IPOs.
Guidelines for exercising green shoe option
How green shoe option works
Role of the stabilising agent
Greenshoe option in action
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