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Business News/ Opinion / Ask Mint | The greenshoe option can help companies get past listing blues
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Ask Mint | The greenshoe option can help companies get past listing blues

Real Simple | Shailaja and Manoj K Singh

Ask Mint | The greenshoe option can help companies get past listing blues

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Johnny: So the initial few days after the listing are very crucial for an IPO. Is there any way to ensure that the prices do not fall below the offer price immediately after listing?

Also Read Shailaja and Manoj K Singh’s earlier columns

Jinny: Well, many companies use what is called a “greenshoe option". Although a greenshoe option in itself can’t put life into a dead IPO, it can be a very useful tool for stabilizing prices immediately after the listing of shares.

Johnny: Can you elaborate on what exactly a greenshoe option is?

Jinny: A greenshoe option is a well-known term in the world of stock markets. In legal parlance, it is also known as an “over-allotment option". As you may be aware, in a public offering a company sells its shares to investors, which get listed on a stock exchange for subsequent trading. Green Shoe Co., an American company, was the first to use this kind of option in their public offering, hence the name greenshoe option. This option gives the issuer company a right to sell more shares to investors than originally planned in their public offering if the demand situation requires such an action after the listing. The greenshoe option can greatly help in stabilizing the prices after listing. For public offerings in the Indian stock market, a company interested in using the greenshoe option has to follow the guidelines prescribed by the Securities and Exchange Board of India (Sebi), the stock market regulator. As per Sebi, the size of excess allotment or the greenshoe option shall not exceed 15% of the total issue size.

Illustration: Jayachandran / Mint

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Published: 20 Jul 2009, 01:15 AM IST
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