GREEN A Price

SHOE Stabilization
OPTION Mechanism

Rohan Pradhan(141444)
Rupam Khatri(141445)
Sahil Anand(141446)

Definition
A green shoe is a clause contained in the
underwriting agreement of an initial (IPO) that
allows underwriters to buy up to an additional
15% of company shares at the offering price
(of the total IPO size).

What is it ?
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.
It is a provision, in underwriting agreement, that
allows the underwriter to sell the additional shares
then the original number of shares offered.

Origination
The term Green Shoe Option derived from a
Company named Green Shoe Manufacturing
Company, founded in 1919.
This company is now called as Stride Rite Corp.
This Company was the 1st who initiated this option in
1960.
It is also known as GSO.

Why GSO?
This would normally done to reduce the risk of the
IPO (Initial Public offering).
Also, when the public demand for the shares exceeds
expectations and the stock trades above the offering
price.
It is mainly practiced in US and European Market.

Objectives
Price stability.
Reduce the risk.

Requirements
Shareholders approval of further allotment of shares to SA (stabilizing
agent).
One BR/LM (Book Runner or Lead Manager) to be appointed as SA.
Maximum shares that can be over-allotted is 15% of the issue size.
Disclosures of specified details in offer document.
Stabilization mechanism available for 30 days after trading starts.

Shares to be transferred to lender (s)not later than 2 working days after

stabilizing period subject to the remaining lock-in.
SA to file daily and final report to SEs / SEBI.

The green shoe option.

Shares borrowed for
over allotment.

promoter

Money
deposited in
GSO bank
account in
place of shares
alloted.

GSO bank account

Money taken from the GSO

bank account for buying
shares from the
market(during stabilization
period)

Public

GSO Demat account

If the stabilization agent is able

to buy amount of shares
borrowed from the promoter,it
returns them to the promoter

public

If the SA is unable to buy shares

equal to the number of shares
borrowed from the promoter within
the stipulated period .New shares
are issued by the issuer company
and they are credited to GSO Demat
account .These shares are returned
to the promoters.

Shares bought from the

market are deposited into
the GSO Demat account

Working Mechanism
Shares up to 15% of issue size allotted as a part of IPO.
Money received on over allotment is deposited in GSO Bank A/C.
SA purchases shares from the market, if market price falls below the issue
price.
Shares are transferred to lender(s); balance shares, if any, are issued to
lender(s).
Time period is 30 days.

Example
For example, if a company decides to publicly sell 1 lakh
shares, the underwriters (or "stabilizers") can exercise their
green shoe option and sell 1.15 lakh shares. When the shares
are priced and can be publicly traded, the underwriters can
buy back 15% of the shares. This enables underwriters to
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 green shoe option is useful: it allows the underwriters to
buy back the shares at the offering price, thus protecting
them from the loss.

Continued..
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.

Conclusion
The green shoe has the 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.

Bibliography
SEBI DIP (disclosure and investor
protection)Guidelines
SEBI Website
wikipedia

THANK YOU