Greenshoe Option
Key Highlights
-
A Greenshoe Option is a provision in an initial public offering (IPO) that allows the underwriters to sell more shares than initially planned, usually up to 15% extra, if there is high investor demand.
-
Types includes Full, Partial and Reverse Greenshoe.
What is Greenshoe Option?
A Greenshoe Option (also called an over-allotment option) is a provision in an initial public offering (IPO) that allows the underwriters to sell more shares than initially planned, usually up to 15% extra, if there is high investor demand. It helps stabilize the stock price after the IPO and protect underwriters from price volatility.
Why It's Called "Greenshoe"?
The term "Greenshoe" comes from the Green Shoe Manufacturing Company, the first company to use this provision in an IPO. Today, it's a standard practice in IPOs around the world.
How Greenshoe Option Works?
- Company plans to issue 1 crore shares in an IPO.
- Underwriters are given a Greenshoe option to sell an additional 15 lakh shares (15%).
- If demand is high, underwriters sell the extra shares.
- If the share price rises above the issue price, they exercise the option by purchasing the additional shares from the company at the issue price.
- If the price falls, they buy back shares from the market to cover the over-allotment—helping support the stock price.
Purpose of the Greenshoe Option
- Stabilizes stock price in the days after the IPO
- Supports investor confidence
- Helps avoid underpricing or overpricing
- Provides flexibility to underwriters to manage supply and demand
Types of Greenshoe Options
| Type | Explanation |
|---|---|
| Full Greenshoe | Underwriters exercise the entire 15% over-allotment |
| Partial Greenshoe | Only part of the over-allotment is exercised |
| Reverse Greenshoe | Used to buy shares from the market to support price (less common) |
Example
Suppose a company offers shares at ₹100 each in an IPO:
- 1 crore shares offered + 15 lakh shares (Greenshoe)
- If the price rises to ₹110 after listing, underwriters buy 15 lakh shares from the company at ₹100 and sell at ₹110 (profit and stability).
- If the price falls to ₹90, underwriters buy shares from the market to cover their position - this supports the price and avoids excessive volatility.
Greenshoe in India
In India, the SEBI (Securities and Exchange Board of India) permits the use of the Greenshoe option to stabilize the post-listing price of an IPO. It is commonly used in large IPOs, especially in high-demand scenarios.