Updated: Mar 14, 2019

Subject: - Corporate finance (Green Shoe Option)



This abstract seeks to bring out the procedure which the researchers have applied to review the present scenario related to SEBI and a facility offered by it namely “Green Shoe Option (also known as over-allocation). It is like a best friend for issuer of IPO. IPO which forms a basic root to stock market, works as a capital raising instrument and even work like a company’s strength, its goodwill etc. Green shoe option used by a “Green shoe manufacturing” company for the first time provides a hedge towards the uncertainty of the price the share issued for the first time by the company. An agreement with underwriters helps in maintaining a price even if it falls or even if it rise unexpectedly. An option with the company enables them to either use it expressly by mentioning the same in the prospectus or by not using the same. This research will help us to understand the basic concept behind this option related with certain real life case.

In the light of above stated research methods researcher would like to attain a conclusion that whether these reforms will achieve the desired results and whether or not these reforms will have positive impact on the Indian Market. The researchers would also try to find out the merits of these reforms and would suggest the possible measures to make a harmonious construction between the merits and demerits of these reforms.


“The first rule of any expertise used in a business is that mechanization applied to an efficient procedure will amplify the efficiency. The second is that mechanization applied to an inefficient procedure will amplify the inefficiency”

By:-Bill Gates

New technologies bring new opportunities but with some new loop holes as well, it is upon us how we try to use it to accomplish our set objective. In this new era of share marketing evolving from physical to dematreliased form of share SEBI has introduced lot of features rather facilities for investors as well as issuer. SEBI has come a long way since its evolution as a watchdog regulating the Indian Stock Markets. It has initiated a lot of reforms to make the market safer for investors. Out of the major policy initiatives taken by SEBI since its inception, out of these one is called as Green shoe option which work as a stabilization mechanism for post listing of freshly issued shares and its related price, SEBI has pronounced the green shoe option facility relating to IPOs. Every company whether lasted or not, requires certain amount of capital to carry on its business activities.

Capital or rather fund can be raised in various ways and if company is a registered company on stock exchange then it can raise money either through IPO (Initial Public Offer) or if not a new company, then it can do so through FPO (Further Public Offer). Irrespective of these type of issues there are various other issues as well i.e. Bonus issue, right issue, and private placement etc. with regard to topic of our concern Green shoe option is an option available with the unlisted company who is doing IPO for the first time. With regard to SEBI (ICDR) 2009 it is requires that a company should receive 90% of its issued capital otherwise the whole should be returned back. To fulfil the gap in between the concept of Underwriter came into being.

Underwriters work as an intermediary between the issuer and the public at large. Underwriting means a contract between the underwriter and the issuer, with or without any type of conditions to subscribe for the securities of a corporate body when the current investors of such body or the public do not subscribe to the securities as per the minimum essential limit. This whole procedure is regulated and monitored by SEBI (Underwriters) Regulations, 1993. With help of this mechanism a balanced form of price structure related to that share can be maintained. It is like a friend to Issuer of IPO as it helps in maintain price stability more over it helps in making image and retain customers by even providing to share those also who oversubscribed it.


“Green Shoe Option” or “over-allocation of shares” means an option of assigning shares in excess of the shares so issued to public and operating a post-listing price stabilizer mechanism as per the provisions of Regulation 45 of SEBI (ICDR) Regulations, 2009. This option provides an occasion to the underwriters to buy a surplus 15% of the shares at the price as per norms, if public demand for the shares exceeds expectations and the share trades above its offering price. The Green Shoe Option is a real price stabilizing machinery for newly listed stocks on the exchanges in India


With the evolution of stock market all over the world it introduces various new facilities which was later on followed by various others countries as well, one facilities out of these is a green shoe option.

· Why “Green shoe”:-

The basic concept of over subscribing the shares by lending some of the shares from promoters or other members was first done by a company named Green Shoe Company by Jacob A. Slosberg and Philip Green, which was later on purchased by Stride Rite Corp. a US based company who got itself a public company in 1960 and got itself registered in new York Stock Exchange.[1]

· In India:-

Green Shoe Option which is also commonly known as over-allotment option was introduced by SEBI in 2003 to stabiles the price of the shares after issuing the same. In 2009, it was recognized by regulation 45 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. It provide eligibility and requirements from the side of the management of the company to be fulfilled.

Basic Meaning:-

When company issues share for the very first time it requires various legal requirements to be fulfilled guided by various acts and regulations. Since a company is a new issuer it may be possible that it is not very popular due to which it can face various problems in form of subscription. An issue can be over-subscribed or can be undersubscribed. In case shares subscribed are less than the amount issued in that case underwriters plays a vital role as they had an agreement with the company to purchase the shares if it got undersubscribed. But, what will happen in the situation of over subscription. Let’s take an example if a XYZ company issue ₹200000 of share capital divided into ₹100 per share amounting to total of 2000 shares. When so issued the got an application for 2500 share in that situation what happen is that either they will allot shares on pro rata basis or can return the excess money. With evolution of green shoe option now they can even provide excess share that is to exceeds to 2000 shares on pro rata basis as per the procedure so required. This option works as stabilizing factor because the price of shares in the market are guided or rather controlled by the method of demand and supply. In case demand is more it can give a great impact over the shares which is not good for the investors. To protect the interest of the investors in the market the supply of share is increased by the company by lending some of the shares from the promoters which have to be returned. All this task is carried on by a stabilizing agent.[2]


A company wishing for availing this option, should pass the same in the resolution of the general meeting regarding the public issue, allotment of surplus shares to the ‘Stabilizing Agent’ (SA) at the end of the stabilization period should be discussed in the same as well.

The company ought to appoint one of the merchant bankers as an intermediary, amongst the issue management team, as the “stabilizing agent” (SA), who will be accountable for the price stabilization process, if essential. The stabilizing agent shall enter into an agreement with the company issuing IPO, prior to filing of offer document with SEBI. Agreement should clearly state all the terms and conditions relating to the option including any type of fees charged/expenses which is to be incurred by SA for this purpose.

The SA should enter into an agreement with the promoter(s) who will lend their shares under the provisions of this scheme and should specify the maximum number of shares that may be borrowed from the promoters or the shareholders. So limit should not exceed 15% of the total issue size. The draft prospectus, the draft Red Herring prospectus, Red Herring prospectus and the final prospectus should have all details related to these option and matters. The agreements should also be included as substantial documents for public inspection. The lead merchant banker or in consultation with the SA, shall determine the amount of shares that are required to be over-allotted with the public issue, subject to the maximum number of 15%.

The prospectus should adhere to all the laws so required. The stabilization mechanism should be available for the period so disclosed by the company in the prospectus. The maximum permutable period is of 30 days from the date when trading permission was given by the exchange.[3]

The Stabilizing agent should open a special account with a bank known as “Special Account for Green Shoe Option proceed of company” (hereinafter referred to as the GSO Bank Account) and a special account for the purpose of securities with a depository participant to be called the “Special Account of GSO shares of company” (hereinafter referred to as the GSO Demat Account).

The money received from the applicants due to over subscription in the green shoe option should be kept in the Green Shoe Option Bank Account, distinct from the issue account and shall be used for the purpose of buying shares from the market, during the stabilization period.

The shares bought from the market and lying in the GSO Demat Account opened under Indian depository should be returned to the promoters immediately, in any case not later than 2 working days after the close of the stabilization period if it remains so. The prime objective of the SA should be to stabilize post listing price of the shares. The SA should determine the timing, quantity and the price at which the shares are to be bought etc.

On expiry of the stabilization period, in case the Stabilizing Agent does not buy shares to the extent of shares over-allotted by the company from the market, the issuer company ought to allot shares to the extent of the shortfall in dematerialized form only to the GSO Demat Account, within 5 days of the closure of the stabilization period. These shares shall be returned to the promoters by the Stabilizing Agent in lieu of the shares borrowed from them and the GSO Demat Account shall be closed thereafter. The company shall make a final listing application in respect of these shares to all the exchanges in India where the shares allotted in the public issue are listed. Any provisions relating to preferential issues shall not be applicable to such type of allotment.[4]

The SA is accountable to submit a report to the stock exchange(s) on a daily basis during this stabilization period. The SA should submit a final report to Stock Exchange Board of India in the format specified in Schedule XII of the act. This report shall be signed by the Agent and the company. This report shall be accompanied with various statements like a depository statement for the “GSO Demat Account” for the stabilization period, indicating the transaction to no. of share credited and debited from the account. The report shall also be accompanied by an undertaking given by the SA and countersigned by the depository regarding confirmation of lock-in period on the shares so required, returned to the promoters in lieu of the shares borrowed from them for the purpose of the stabilization. The Stabilizing agent will maintain a register in respect of each issue having the green shoe option in which he acts as a SA. The register must be reserved for a period of at least 3 years from the date of the end of the stabilizing period.

For instance, if company XYZ decides to sell 20 million shares, the underwriters may exercise their option of “GREN SHOE” and sells them at 22.5 million shares. When the shares come into reality over the market, the underwriters can buy back those shares which are oversubscribed i.e. 15% of the shares. If the market price as to those shares exceeds the offer price, the underwriters exercise the option to buy back oversubscribed shares at the offer price, thus protecting them from any type of loss. Similarly, if the shares trade below the offer price of the shares, it may create a wrong impression and precedent in the minds of the investors regarding company and investors may sell the shares they have bought or stop buying more from the market. In such a situation, to stabilize share prices, the underwriters usually exercise their option and buy back the 15% shares at the offer price of shares and return the shares to the issuer. In this entire process the company has no role to play except the legal procedure and any gains or losses arising out of the green shoe option belongs to the underwriters along with the stabilizing agent.[5] Shares which exceeds the limit are basically borrowed from promoters and shareholders over an agreement which have to be returned back in a stipulated time and as per the procedure of the regulations. Borrowing of shares is not always required it is required in case when prices hits the price. It will give a very bad impression of a company over investors if price will fluctuate a lot at a very initial stage of trading of an IPO.

Advantages of GSO:-

· It helps in fulling the requirements of the investors over the limits.

· It is done over an agreement, providing a legal bendiness to the procedure.

· Works as a stabilizing agent over the prices of newly issued shares.

· Maintain a goodwill of a company in a positive way.

Disadvantages of GSO:-

· Complex and time involving procedure.

· Requires consent of every member over resolutions and meetings.

· Is only applicable at the stage of IPO.

· Use of these shares are limited upto15% which are not sufficient in certain cases.


Alibaba bankers:-

Chinese e-commerce giant Alibaba closed its initial public offer (IPO) through issue of American Depository Receipts (ADR) on the New York Stock Exchange raking in a record $25 billion in the biggest ever public float of any company ever as its bankers exercised the underwriting option. In year of 2014 green-shoe option raised an additional $3.26 billion, just under half if it going to selling shareholders Yahoo, founder & CEO Jack Ma and co-founder Joseph Tsai.

Facebook IPO:

An IPO relating to the most popular social website will have a direct persecution with regard to its success and high popularity. But it is not always true let’s start it with the crux of the case where there was no direct use of overallotment but it can be traced from the instances. An initial pop in the price of an IPO is understandable, almost expected. But when we see a subsequent drop in price of shares and to keep the price at or nearby the original IPO price per share we can make a circumstance which can reflect that the Green Shoe option has been used. Morgan Stanley, a famous underwriter shorted 63 million shares of FB which can represents the use of Green Shoe Option. From Facebook’s perspective, it was needed to cover the resulting upward pressure on the stock price. It also helps in providing market liquidity over demand for the stock. As per Morgan’s perspective this was not exactly a “naked short” resulting into Green Shoe Option which gave them a right to go back to Facebook and purchase an additional 63 million shares @ $38 (less fees).

1. The IPO price moves higher. Then Morgan sells those shares to the anxious buyers.

2. The IPO didn’t result into good move and the price declines. This buying action of Morgan will support share price. The price declined to around $38 and then a large blocks of shares were purchased. But at last green shoe option exhaust and it finally falls down.

To further support this instance, look at certain stats from Friday, May 18th:

· At $38 per share 43 million shares were bought.

· Along with 28.5 million shares which were purchased at $38.01

Common sense relating to circumstances tells us that most of that buying was done by Morgan Stanley who was attempting to support the share price of an unsuccessful IPO. On Monday, May 21st, it appears that the Green Shoe Option was exhausted as the price plummeted to $34.

Nagarjuna Construction (NCC):-

NCC a Hyderabad based Infrastructure Co., raises around ₹550 crore through qualified institutional placement (QIP) with a Green Shoe Option in their prospectus to retain ₹ 50 crore in case the issue is over-subscribed. It reflects a use of Green Shoe Option in Indian market as well. A QIP is a capital raising tool, where a listed company can issue equity shares or any securities other than warrants, which are convertible into equity shares, to a qualified institutional buyer (QIB). On March 31, 2009, the Company posted a good profit amounting to net profit of ₹ 180 crore in Financial Year 2009.

Exxon Mobil Corporation:-

The Esso unit of Exxon Mobil Corporation sold an additional 84.58 million shares during its IPO, because investors placed orders to buy around 475.5 million shares whereas Esso had initially offered only 161.9 million shares. The company took this step because the demand exceeded their share supply by two-times the initial amount.


Green shoe option which is evolved or rather introduced by SEBI for a very noble purpose is not widely used by Indian companies as with regard to a remedy as to over subscription it can also help to maintain a balance of the unmerciful IPO. An unsuccessful IPO reflects a negative goodwill towards the company due to which companies use to follow this concept in secrecy without violating legal norms. SEBI who works as a watchdog to Indian Stock markets has provided various facilities to protect the interest of the investor and to accomplish its objective for which this act or board was commonly evolved. If we see from the investor’s point of view, companies having green shoe option in their IPO process are considered to be less risky and has a good goodwill because they have a built-in price stabilizing tool which will ensure the prices stability as it will not go below its offer price. The price stabilization through Green Shoe Option proves to be a blessing in disguise for the wholesale investors in case of violent instabilities in the share prices. Investors tend to give better pricing of offers with a green shoe option or with price stabilization, as they are sure that post-listing, the merchant banker will guarantee price stability. One reason of using the GSO is its ability to diminish the risk for the company issuing the shares. It allows the underwriter to have buying authority in order to cover their short position in case of any shortfalls in prices, without the risk of having to buy stock if the price rises. In return, this helps to keep the price of newly issued share stable, which positively affects both the issuers and investors and public at large in economical matter.

[1] Greenshoe Option, April 21, 2018, available at https://www.investopedia.com/terms/g/greenshoe.asp excessed on.

[2] Sujatha N Sheeri, Green Shoe Options in India, ISSN 2320-2793 (online)

[3] Naveen Alle, Green Shoe Options in India, NSE March 2012.

[4] Capital Markets and Security Laws, ICSI (Executive, Module 2), 2017.

[5] Green Shoe Option, April 21, 2018, available at

https://www.caclubindia.com/articles/green-shoe-option-2927.asp .

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