Green Shoe Option

Public issue of shares (also knows as IPO) is a very common way of raising funds
by a corporate entity. However many a times it has been seen that after public
issue of shares the listed price of securities falls below issue price which creates panic
in the market and discourages the investors to put their hard earned money in IPO
market.



In order to encounter this problem, Green Shoe option is used in most of the IPOs
which reduces the risk of fall in prices of the shares after listing of shares to a certain
extent.
The aim of this scheme is to provide price support in case prices falls below issue
prices. Under this scheme upto 15% overallotment of securities is made after
borrowing the same from promoters and if the prices falls after listing of shares then
the shares are bought back from the market to create demand for the shares which
provides price support.
The steps involved in Green shoe option can be explained with the help of below
flow chart:


The above concept can also be explained with the help of below example:
Example: Say X Ltd is going to issue 1,00,000 equity shares of Rs 10 each (Face Value)
at a price of Rs 90 each (i.e premium of Rs 80). Out of the above say 20% will be issued
to promoters and/or existing shareholders and balance 80% (i.e 80,000 shares) will be
issued to public.
In order to ensure that post listing price should not fall below Rs 90 (i.e issue price)
stabilizing agent is appointed and he borrows (on returnable basis) 15% of total issue
size (i.e 15% of 1,00,000 shares = 15,000 shares) from promoters / existing
shareholders.
The public offer is over subscribed and 95,000 shares (instead of original 80,000
shares) are issued to pubic and money is received in respect of 95,000 shares @ Rs
90.
The excess application money in respect of 15,000 shares is kept in a separate bank
account to be used in case prices falls below issue price of Rs 90.
Say listing date is 1 March and hence golden shoe option will be available till 30
March (i.e maximum 30 days from date of listing).

The prices of shares on 1 30 days are as below:

Day	Price	Day	Price	Day	Price
1	Above 90	11	Above 90	21	Above 90
2	Above 90	12	Above 90	22	Above 90
3	Above 90	13	Above 90	23	Above 90
4	Above 90	14	Above 90	24	Above 90
5	88	15	Above 90	25	Above 90
6	Above 90	16	Above 90	26	Above 90
7	Above 90	17	Above 90	27	Above 90
8	Above 90	18	Above 90	28	Above 90
9	Above 90	19	Above 90	29	Above 90
10	84	20	Above 90	30	Above 90

As we know the purpose of Green shoe option is to provide price support in case
price falls below issue price (i.e Rs 90 in given case). Hence GSO will not be applied in
case price is above Rs 90.
On 5 and 10 day price is below Rs 90 and hence green shoe option will be
exercised. Say on 5 day stabilizing agent purchases 2,000 shares @ Rs 88 and on 10
day stabilizing agent purchases 5,000 shares @ Rs 84. The above action will create
demand for the shares and will provide price support to shares.
Now after 30 days are over, stabilizing agent need to return 15,000 shares to
promoters / existing shareholders. However he has only 7,000 shares (i.e 2,000 +
5,000). In the given case the shortfall of 8,000 shares will be met by further issued of
shares by the company to the stabilizing agent @ Rs 90 and stabilizing agent will
return all 15,000 shares to promoters / existing shareholders.
The summary of bank account and demat account of stabilizing agent is as below:

Bank Account
Particulars	Am Rs	Particulars	Am Rs
To public offer (15,000 @ 90)	1,350,000	By Purchase on 5th day (2000 @ 88)	176,000
		By Purchase on 10th day (5000 @ 84)	420,000
		By Fresh allotment (8000 @ 90)	720,000
		By Investor Protec and Education Fund (Bal Fig)	34,000
	1,350,000		1,350,000

Demat Account
Particulars	No of Shares	Particulars	No of Shares
To Purchase on 5th day	2,000
To Purchase on 10th day	5,000	By Return to Promoter	15,000
To Fresh allotment	8,000
	15,000		15,000

From the above bank account we can see that surplus in bank account (arising out of
purchase of shares at a price lower than issue price) is transferred to Investors
Protection and education fund.
Hence we can conclude that Green Shoe Option is a better mechanism to save the
interest of shareholders in case of public offer to certain extent.
Detail Regulations with regard to Green Shoe Option is as below:
An issuer making a public issue of specified securities may provide Green Shoe
Option (GSO) for establishing the post listing price of its specified securities subject to
the following:
(a) the issuer has been authorized, by a resolution passed in the general meeting of
shareholders approving the public issue, to allot specified securities to the stabilising
agent, if required, on the expiry of the stabilisation period;
(b) the issuer has appointed a merchant banker or book runner, as the case may be,
from amongst the merchant bankers appointed by the Issuer as a stabilising agent,
who shall be responsible for the price stabilisation process;
(c ) prior to filing the draft offer document with the Board, the issuer and the
stabilising agent have entered into an agreement, stating all the terms and conditions
relating to the green shoe option including fees charged and expenses to be incurred
by the stabilising agent for discharging his responsibilities;
(d) prior to filing the offer document with the Board, the stabilizing agent has entered
into an agreement with the promoters or pre-issue shareholders or both for
borrowing specified securities from them in accordance with clause (g) of this subregulation,
specifying therein the maximum number of specified securities that may
be borrowed for the purpose of allotment or allocation of specified securities in
excess of the issue size (hereinafter referred to as the “over- allotment”), which shall
be = or < 15% of the issue size;
(e) subject to clause (d), the lead merchant banker or lead book runner, in
consultation with the stabilising agent, shall determine the amount of specified
securities to be over-allotted in the public issue;
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(f) the draft and final offer documents shall contain all material disclosures about the
green shoe option;
(g) in case of an initial public offer pre-issue shareholders and promoters and in case
of a further public offer pre-issue shareholders holding more than 5% specified
securities and promoters, may lend specified securities to the extent of the proposed
over allotment;
(h) the specified securities borrowed shall be in dematerialised form and allocation of
these securities shall be made pro-rata to all successful applicants.
(2) For the purpose of stabilisation of post-listing price of the specified securities, the
stabilising agent shall determine the relevant aspects including the timing of buying
such securities, quantity to be bought and the price at which such securities are to be
bought from the market.
(3) The stabilisation process shall be available for a period <or = 30 days from the date
on which trading permission is given by the recognised stock exchanges in respect of
the specified securities allotted in the public issue.
(4) The stabilising agent shall open a special bank account, distinct from the issue
account for crediting the monies received from the applicants against the
overallotment and a special demat account with a depository participant for crediting
specified securities to be bought from the market during the stabilisation period out
of the monies credited in the special bank account.
(5) The specified securities bought from the market and credited in the special
account with the depository participant shall be returned to the promoters or preissue
shareholders immediately, in any case not later than 2 working days after the
end of the stabilization period.
(6) On expiry of the stabilisation period, if the stabilising agent has not been able to
buy specified securities from the market to the extent of such securities overallotted,
the issuer shall allot specified securities at issue price in dematerialised form to the
extent of the shortfall to the special account with the depository participant, within
five days of the closure of the stabilisation period and such specified securities shall
be returned to the promoters or pre-issue shareholders by the stabilising agent in
lieu of the specified securities borrowed from them and the account with the
depository participant shall be closed thereafter.
(7) The issuer shall make a listing application in respect of the further specified
securities allotted under sub-regulation (6), to all the recognised stock exchanges
where the specified securities allotted in the public issue are listed and the provisions
of Chapter VII shall not be applicable to such allotment.
(8) The stabilising agent shall remit the monies with respect to the specified securities
allotted under sub-regulation (6) to the issuer from the special bank account.
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(9) Any monies left in the special bank account after remittance of monies to the
issuer under sub regulation (8) and deduction of expenses incurred by the stabilising
agent for the stabilisation process shall be transferred to the Investor Protection and
Education Fund established by the Board and the special bank account shall be
closed soon thereafter.
(10) The stabilising agent shall submit a report to the stock exchange on a daily basis
during the stabilisation period and a final report to the Board.
(11) The stabilising agent shall maintain a register for a period of at least 3 years from
the date of the end of the stabilisation period and such register shall contain the
following particulars:
(a) The names of the promoters or pre-issue shareholders from whom the specified
securities were borrowed and the number of specified securities borrowed from each
of them;
(b) The price, date and time in respect of each transaction effected in the course of
the stabilisation process; and
(c) The details of allotment made by the issuer on expiry of the stabilization process.