Define Green Shoe Option (G.S.O)

Meaning

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 stabilizing mechanism through a stabilizing agent.

For Instance if a company decides to publicly sell 10 lakh shares, the underwriters can implement their green shoe option and sell 10.15 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 alleviate fluctuating share prices by increasing or decreasing the supply of shares according to intial public demand.

The green shoe option has the ability to diminish the risk for the company issuing the shares. It allows the underwriters to have good buying power in order to cover their deficit when a stock price falls without the risk of having to buy stock if the price rises. This in turn ensures the price stability of share prices which has greater positive impact on the investors and issuers.

Origin of Green Shoe Option

The term Green Shoe Option is derived from a company named “Green Shoe Manufacturing Company established in 1919. This company is currently known as Stride Rite Corp. This Company was first to commence this option in 1960. It is mainly practiced in US and European Market

Why GSO?

It is to reduce the risk of the IPO (Initial Public Offering). When the public demand for the shares exceeds expectations and the stock trades above the offering price.

Objectives of GSO

Risk diminution

Price constancy

Stabilizing Agent

The stabilizing agent is one of the merchant bankers/book runners. He is responsible for the price stabilization process. He is appointed by the issuing company. The stabilization agent borrows shares from the promoters/pre issue share holders. The maximum that can be borrowed is 15% of the total issue. The merchant banker in consultation with the Stabilization Agent determines the amount of shares to be allotted in excess of the public issue. The excess allotment is made out of the shares borrowed from the promoters.

Conditions

The issuing company should seek authorization for the possibility of allotment of further issues to the stabilizing agent together with the authorization for the public issue in the general meeting of its shareholders.

The stabilizing agent should enter into an agreement with the issuer company, prior to the filing of the offer document with the SEBI.

The agreement should clearly state all the items/conditions relating to Green Shoe option including fees charged/expenses to be incurred by the Stabilizing Agent for this purpose.

The Stabilizing Agent should enter into agreement with the promoters or pre issue shareholders who would lend their shares specifying the maximum number of shares that may be borrowed from them. It should not exceed 15% of the total issue size.

Draft Prospectus/Final Prospectus Contents

The draft prospectus/final Prospectus should contain

Name of Stabilizing Agent.

Maximum number of shares and the percentage of the proposed issue size.

Period for which the company proposed to avail of the stabilization mechanism.

Details of the agreement with promoters and stabilizing agent such as name of promoters, their holdings, number and % of shares to be lent by them, rights & obligations of each party etc.

Exact number and % of over allotment to total issue size should be disclosed in the final prospectus.

Maximum amount of securities to be received by the company in case of further allotment should be disclosed in final document to be filed with R.O.C. The use of these additional funds should also be disclosed.

Other Conditions

In case of an IPO by an unlisted company/public issue by a listed company the promoters/pre issue shareholders holding more than 5% shares may lend their shares which are in dematerialized form only.

The Stabilizing Agent would borrow to the extent of over allotment proposed.

The allocation of these shares should be on pro rata basis to all the applicants.

Period of Stabilization Mechanism

The stabilization mechanism would be available for the period disclosed by the company in the prospectus up to a maximum grant of trading of 30 days from the date of permission by the stock exchange.

Accounting Procedure

The money received from the applicants against the over allotment in the G.S.O should be kept in G.S.O Bank account. It is to be used for buying shares from the market during the stabilization period. These shares should be credited to G.S.O Demat account. They should be returned to the promoters immediately within 2 working days after the close of the stabilization period.

If the stabilization agent does not buy shares to the extent of their over allotment from the market, the issuer company should allot shares to the extent of the shortfall in dematerialized form to G.S.O demat Account within 5 days of the closure of the stabilization period. These would be returned to the promoters by the stabilization agent in lien of those borrowed from them and the G.S.O demat account would be closed. Such shares would be listed in all the concerned Stock Exchanges where the shares allotted in the public issue are listed. The shares returned to promoters would be subject to the remaining lock in period.

The stabilization agent would remit the issue price to the company from the G.S.O Bank account. The remaining balance, net of expenses incurred by the Stabilization agent would be transferred to the investors’ protection fund of the concerned stock exchange and the G.S.O Bank account would be closed.

During stabilization period, the Stabilization agent should submit a daily report signed by him/company to SEBI in the specified form and also submit the following:

A depository statement for the G.S.O demats account for stabilization period.

An undertaking by the stabilization agent and countersigned by the depositories in respect of confirmation of lock in shares returned to the promoters in lien of the shares borrowed from them for stabilization purposes.

The stabilization agent must maintain in respect of each issue with G.S.O, a register contain the following details:

Price, date and time of each transaction

Promoters and the number of shares borrowed from each.

Allotments made.

The register should be maintained for at least 3 years from the date of the stabilizing period.