Green Shoe Option (GSO)¶
The Green Shoe Option (GSO) is a financial mechanism used during the issuance of equity shares to stabilize the price of a newly listed stock in accordance with SEBI (Securities and Exchange Board of India) guidelines. It allows the issuer company to allocate additional equity shares beyond the original issue size in order to manage and stabilize the post-listing stock price. Here is an explanation of the key aspects of the Green Shoe Option:
Purpose of the Green Shoe Option¶
The primary purpose of the Green Shoe Option is to stabilize the stock price of a newly listed company in the secondary market. After an initial public offering (IPO), the stock's price can be subject to significant fluctuations due to market forces and investor sentiment. The GSO helps mitigate these fluctuations by allowing for the issuance of additional shares in response to strong demand or upward price pressure, thereby helping to maintain price stability.
Authorization by Shareholders¶
Before the Green Shoe Option can be exercised, shareholders of the issuer company must authorize it at a general meeting. This authorization is necessary to ensure transparency and alignment with the company's governance and compliance requirements.
Role of the Book Running Lead Manager (BRLM)¶
The Book Running Lead Manager (BRLM) typically acts as the Stabilizing Agent (SA) responsible for implementing the Green Shoe Option, as per SEBI guidelines. The BRLM plays a crucial role in the entire process, including the determination of the number of shares to be over allotted.
Limit on Over-Allotment¶
The number of shares that can be over allotted through the Green Shoe Option is subject to a cap. According to SEBI guidelines, this cap cannot exceed 15% of the total issue size. In other words, the GSO allows for the issuance of additional shares up to 15% of the original offer size.
Mechanism of the Green Shoe Option¶
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Market Stabilization: After the stock is listed, if there is significant demand and the stock price rises above the issue price, the Stabilizing Agent (BRLM) may exercise the Green Shoe Option to purchase additional shares from the issuer company.
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Additional Share Allocation: The issuer company, in coordination with the Stabilizing Agent, decides the number of shares to be over allotted. These additional shares are typically acquired at the issue price.
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Price Stabilization: The additional shares acquired through the GSO are then sold in the secondary market. This additional supply helps prevent excessive price increases and stabilizes the stock's price.
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Profit for Stabilizing Agent: The Stabilizing Agent may profit from the price difference between the issue price and the market price when selling the additional shares. This profit can offset any losses incurred during the stabilization process.
In summary, the Green Shoe Option is a valuable tool for companies going public to manage price volatility in the secondary market. It provides a mechanism for additional share issuance to maintain stable stock prices and is subject to specific regulatory limits and shareholder authorization. The Stabilizing Agent, often the BRLM, plays a critical role in executing this process.
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