green shoe option
This query is : Resolved
23 October 2009
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.
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 and Exchange Commission (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.)
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.
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 and Exchange Commission (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.)
24 October 2009
is any other definition of it so that i can get it easily?
Guest
Guest
(Expert)
09 November 2009
You can land your shares to any other same as loan to other person.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- About TDS & Income Tax
- Section 194JA & JB Income which ITR Form to use
- Pass word to open justification report for Q1 for FY 2026-27
- PPF interest-As Exempt Income disclosure
- Under construction property in ITR
- Scrutiny and reopening of past returns
- Booth for sales promotion
- Upload Level ValidationITR3Category of Defect B/D
- Building tax payment deduction in rental Income
- F & O PROFIT REPORTING FOR AY 2026-27
- Difference in GSTR3B system generated which is correct and actual Payment it asks
- Indian IT Portal issue in computing tax as per UK-India DTAA
- Capital Gains on sale of residential flat
- PF Taxable Income
- Clarification on Tax Audit Applicability and Reporting of F&O Transactions in ITR-3
- Interest credited in FY2025-2026 & TDS therein by EPFO does not reflect in AIS or Form 26AS
- 44ad eligble money lending interest
- Taxation in the hands of Landowner under JDA
- Delisted shares sold in off market/ Rebate u/s87A
- In Exports Sales HSN details where to fill
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
Subscribe to Pro
Join an elite circle of professionals
CAclubindia
