What is an IPO Green Shoe Option | Over-allotment Option?

This isn’t a type of Shoe Brand that I am going to talk about. With full respect to the genre of this investment tips finance blog, Green Shoe is a kind of option which is primarily used at the time of IPO or listing of any stock to ensure a successful opening price.

A green shoe option means that an underwriter of a security can choose to sell more stocks of the company going for IPO if the demand of the stocks exceeds the number of stocks made available for the offerring.

Any company when decides to go public generally prefers the IPO route, which it does with the help of big investment bankers also known in the financial market place as UNDERWRITERS. This sounds remotely like an UNDERTAKER but fortunately these underwriters are the guys responsible for making the issue successful and find the buyers for company’s shares. The company after making the decision to go public zeroes in to select their underwriters to find the buyers for their issue. These Underwriters also sometime help the Corporate in determining the issue price and the kind of equity dilution i.e. how many shares will be made available for the public.

But with the turbulent times prevailing in the market place, it is however quite possible that the IPO undersubscribed and trades below its issue price.

This is where these Underwriters invoke the Green shoe option to stabilize the issue.Green shoe option derives its name from the Green Shoe company of US which used it for the first time.

Green Shoe Option technically speaking or rather Wikipedia Speaking is,

A Green Shoe, also known by its legal title as an “over-allotment option” (the only way it can be referred to in a prospectus), gives underwriters the right to sell additional shares in a registered securities offering if demand for the securities is in excess of the original amount offered. The Green Shoe can vary in size up to 15% of the original number of shares offered.

This option is also called the over-allotment option.

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One Comment

  1. If the issue is trading below the issue price, the greenshoe would not be exercised. Instead the underwriters would purchase shares in the open market.

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