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Summary
It grants the underwriter the rights to sell more shares
Green shoe option is an over-allotment option that grants the underwriter the rights to sell more shares to an investor than planned by the issuer, if the demand for security issue is higher than expected. This is often regarded as the best friend of an IPO.
An underwriter can sell up to 15% more of the shares than expected. This provides price stability and liquidity.
It also provides buying power to cover short positions when the price falls. It is the only price stabilization method accepted by the Securities and Exchange board of India (SEBI).
The green shoe option allows companies to intervene in the market to stabilise share prices during the 30-day stabilisation period immediately after listing. This involves purchase of equity shares from the market by the company-appointed agent in case the shares fall below issue price.
The green shoe option is exercised by a company making a public issue. The issuer company uses green shoe option during IPO to ensure that the shares price on the stock exchanges does not fall below the issue price after issue of shares.
Green shoe is a kind of option which is primarily used at the time of IPO or listing of any stock to ensure a successful opening price. Any company when decides to go public generally prefers the IPO route, which it does with the help of big investment bankers also called underwriters. These underwriters are responsible for making the public issue successful and find the buyers for company’s shares. They are paid a certain amount of commission to do this work.
Green shoe option is a clause contained in the underwriting agreement of an IPO. The green shoe option is also often referred to as an over-allotment provision. It allows the underwriting syndicate to buy up to an additional 15% of the shares at the offering price if public demand for the shares exceeds expectations and the stock trades above its offering price.
Reverse Green shoe option is similar to Green shoe option but it is structured as ‘put’ option in lieu of ‘call’ option, but just like its counter’s objective it is also to promote price stability around the IPO.
