Green shoe option
Also called: Over-allotment option · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
A green shoe option lets a company selling shares in a public issue allot up to 15% more shares than the planned issue size. It is also called an over-allotment option. The extra shares are used to keep the share price steady after listing. If the price falls below the issue price, the money raised from the extra shares is used to buy shares back from the market. That buying supports the price. If the price holds up, the extra shares stay with investors.
Example
Suppose a company plans an IPO of 100 crore shares. With a green shoe option, it can allot up to 115 crore shares. If the price slips after listing, the extra 15 crore worth of money is used to buy shares in the market and support the price.
Don't confuse with
- Underwriting: an underwriter promises to buy any shares that investors do not take up, so the issue is fully sold. A green shoe deals with the price after listing, not with unsold shares.
Related concepts
- Primary market
- Initial Public Offering
- Red herring prospectus
- Book building
- Anchor investor
- Qualified Institutional Buyer
- Application Supported by Blocked Amount
- Underwriting
- Grey market premium
- Follow-on Public Offer