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Green shoe option

CA,CS Robin Sojrani (CA & CS ) (148 Points)

26 November 2007

What is Green shoe option???

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3 Replies

Narendra (Employment) (154 Points)
Replied 26 November 2007

It is a POST ISSUE PRICE STABILISING MECHANISM..... this mechanism is helpful to avaoid the unjustified fall in share price after the issue... for more details u can refer any corporate law book prescribed for CA final

Late CA Sampat Jain (Chartered Accountant) (4772 Points)
Replied 26 November 2007

Green Shoe Option

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A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO). The green shoe option, which is also often referred to as an over-allotment provision, allows the underwriting syndicate to buy up to an additional 1amount of the shares at the offering price if public demand for the shares exceeds expectations and the stock trades above its offering price.

The green shoe option provides extra incentive for the underwriters of a new stock offering. In addition, these investment banks, brokerages and other financing parties also often exercise the green shoe option to cover some of the short position they may have created in an effort to maintain a stable market after a new stock begins to trade, as well as to meet aftermarket demand.

Interesting Fact: The Green Shoe Company was the first issuer to allow the over-allotment option to its underwriters, hence the name

astha (CA, CS) (85 Points)
Replied 02 January 2008

Green Shoe Option (GSO) is a process of allocating shares in excess of the no. of shares mentioned in the offer document. The issuer company appoints one of the lead Book runner as the "Stabilising Agent" (SA). The SA enters into an agreement with the Promoters of the Company who agree to lend their shares to the extent of proposed overallotment( max. 5% shares) The SA then opens a GSO demat account and a GSO bank account. The money received from the applicants to extent of overallotmnet is kept separately in GSO bank account. This money is then used to buy shares to the extent of overallotment from the market during the stablilsation period and these shares are kept in GSO demat account These shares are then returned to the promoters, in any case not later then 2 days from the close of stabilisation period. Thus GSO operates as a post listing price stabilisation mechanism