Green shoe option
Up to 15% extra shares allotted so a stabilising agent can support the price after listing.
A green shoe option lets a company allot more shares in a public issue than it originally offered, so that a stabilising agent can support the share price after listing. SEBI's ICDR Regulations define it as an option of allotting equity shares in excess of the shares offered in the public issue as a post-listing price stabilising mechanism.
In India it is governed by Regulation 57 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 for IPOs, and by Regulation 153 for further public offers. A merchant banker meets it as the lead manager who acts as stabilising agent.
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How it works, step by step
- 1
1. Approvals and agreements
Shareholders approve the issue and authorise allotting shares to the stabilising agent if needed. The issuer appoints one of its lead managers as stabilising agent and signs an agreement with it before filing the draft offer document.
- 2
2. Borrowing the extra shares
Before the offer document is filed, the stabilising agent agrees to borrow shares from promoters or pre-issue shareholders. In an IPO, promoters and pre-issue shareholders may lend; in a further public offer, promoters and pre-issue holders of more than 5% may lend.
- 3
3. Over-allotment
The issue is over-allotted by up to 15% of the issue size, using the borrowed shares. They are in demat form and allocated pro rata to all successful applicants. The money for these shares goes into a special bank account, separate from the issue account.
- 4
4. Stabilisation after listing
For up to 30 days from the date the exchanges give trading permission, the stabilising agent may buy shares in the market with the money in the special account if the price falls. It alone decides when, how many and at what price.
- 5
5. Returning the borrowed shares
Shares bought in the market go back to the lenders within two working days after the stabilisation period ends.
- 6
6. Settling any shortfall
If the agent bought fewer shares than it over-allotted, the issuer allots the shortfall at the issue price within five days of the period closing, and those shares go back to the lenders. The agent pays the issuer for them from the special account.
- 7
7. Closing out
Money left in the special account after paying the issuer and the agent's expenses goes to SEBI's Investor Protection and Education Fund. The agent reports to the exchange daily during stabilisation and sends a final report to SEBI.
Two outcomes in rupees
Illustrative numbers. An IPO of 1 crore shares at ₹100 with a full green shoe: 15 lakh shares borrowed from the promoter and over-allotted, so the special account holds ₹15 crore.
What the agent does
Price falls to ₹92 after listing
Buys back up to 15 lakh shares in the market, supporting demand
Price rises to ₹130 after listing
Usually buys nothing, because the price needs no support
Shares returned to the promoter
Price falls to ₹92 after listing
The shares bought in the market
Price rises to ₹130 after listing
15 lakh new shares allotted by the company at ₹100
Money
Price falls to ₹92 after listing
Spent on market purchases; any balance after expenses goes to the Investor Protection and Education Fund
Price rises to ₹130 after listing
₹15 crore paid to the company for the new shares
Effect on issue size
Price falls to ₹92 after listing
Stays at 1 crore new shares
Price rises to ₹130 after listing
Rises to 1.15 crore new shares
| Price falls to ₹92 after listing | Price rises to ₹130 after listing | |
|---|---|---|
| What the agent does | Buys back up to 15 lakh shares in the market, supporting demand | Usually buys nothing, because the price needs no support |
| Shares returned to the promoter | The shares bought in the market | 15 lakh new shares allotted by the company at ₹100 |
| Money | Spent on market purchases; any balance after expenses goes to the Investor Protection and Education Fund | ₹15 crore paid to the company for the new shares |
| Effect on issue size | Stays at 1 crore new shares | Rises to 1.15 crore new shares |
Free account, this exam preselected.
Who carries the risk
Investors who receive over-allotted shares get ordinary shares at the issue price like everyone else. The promoter lends shares and gets the same number back, either bought from the market or freshly allotted. The stabilising agent can only spend what is in the special account, so stabilisation support has a hard ceiling.
How Series IX tests this
The numbers SEBI fixes are the questions: over-allotment not more than 15% of the issue size, stabilisation for not more than 30 days from trading permission, shares returned within two working days, shortfall allotted within five days, and leftover money to the Investor Protection and Education Fund.
The trap is the role. The stabilising agent is a lead manager, not the registrar, the underwriter as such, or the company. And the agent, not the issuer, decides the timing, quantity and price of market purchases.
FAQs
What is a green shoe option in an IPO?expand_more
An arrangement under which the issue is over-allotted by up to 15% using shares borrowed from promoters or pre-issue shareholders, so that a stabilising agent can buy shares in the market to support the price after listing.
Who is the stabilising agent?expand_more
One of the issue's lead managers, appointed by the issuer under Regulation 57 of the SEBI ICDR Regulations. It runs the stabilisation and reports to the exchange daily and to SEBI at the end.
How long does price stabilisation last?expand_more
Not more than 30 days from the date the stock exchanges grant trading permission for the shares allotted in the issue.
What happens to the green shoe money if the price goes up?expand_more
The agent does not buy in the market. The company allots new shares at the issue price to cover the over-allotment, and the money in the special account is paid to the company.
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