Companies that want to venture out and start selling their shares to the public have ways to stabilize their initial share prices. One of these ways is through a legal mechanism called the greenshoe option.
**Greenshoe option** is a special provision in an IPO prospectus, which allows underwriters to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option. -The greenshoe option provides stability and liquidity to a public offering. For example, a company intends to sell one million shares of its stock in a public offering through an investment banking firm (or group of firms, known as the syndicate) which the company has chosen to be the offering's underwriters. Stock offered for public trading for the first time is called an initial public offering (IPO). Stock that is already trading publicly, when a company is selling more of its non-publicly traded stock, is called a follow-on or secondary offering. -The underwriters function as the brokers of these shares and find buyers among their clients. A price for the shares is determined by agreement between the company and the buyers. When shares begin trading in a public market, the lead underwriter is responsible for helping to ensure that the shares trade at or above the offering price. -
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Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines, which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investor's perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market.
**GREEN SHOE OPTION** Hi, Green shoe option is a provision in Initial public offer prospectus which allows underwriters to sell to the investors more shares than the planned shares. It is also referred to as over allotment option. Over allotment is done if the demand for security is higher than what was expected. The term "greenshoe" came from the Green Shoe Manufacturing Company (now called Stride Rite Corporation), founded in 1919. It was the first company to implement the greenshoe clause into their underwriting agreement. Through the green shoe option prize stabilization is done. Thanks
Hie Uma, **Green Shoe Option can be explained as follows :-** Companies that want to venture out and start selling their shares to the public have ways to stabilize their initial share prices. One of these ways is through a legal mechanism called the greenshoe option. A greenshoe is a clause contained in the underwriting agreement of an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price. The investment banks and brokerage agencies (the underwriters) that take part in the greenshoe process have the ability to exercise this option if public demand for the shares exceeds expectations and the stock trades above the offering price.
HIi A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO). Also known 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. How it works/Example: As the underwriter has the ability to increase supply if demand is higher than expected, a greenshoe option can create price stability during an IPO. Some IPO agreements do not include greenshoe options in their underwriting agreements. This is usually the case when the issuer wants to fund a specific project at a pre-determined cost and does not want to be responsible for more capital than it originally sought. Why it Matters: A green shoe option can create greater profits for both the issuer and the underwriting company if demand is greater than expected. It also facilitates price stability. Regards
Dear Uma, Green shoe option: Greenshoe option is a special provision in an IPO prospectus, which allows underwriters to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. Any other query feel free to contact us. Writer CA Chitranjan Agarwal