What is a green shoe option in an IPO?
What is a green shoe option? It is a price-stabilisation tool that lets a company issue more shares in its IPO than the base offer, so the price can be supported after listing. Also called an over-allotment option, it is permitted under the SEBI (Issue of Capital and Disclosure Requirements) Regulations. A stabilising agent over-allots the extra shares, then buys stock in the open market if the price drops below the issue price, cushioning an early fall. Source: SEBI ICDR Regulations.
Definition
A green shoe option
is a SEBI-permitted over-allotment mechanism that lets an IPO issue extra shares to stabilise the price after listing. A stabilising agent over-allots up to 15% of the issue and buys shares in the market if the price falls below the issue price, for up to 30 days. Source: SEBI ICDR Regulations.
How does a green shoe option work?
The mechanics run in a set order. The stabilising agent borrows shares from the promoters or pre-issue shareholders and over-allots them alongside the base issue, collecting the extra proceeds into a dedicated account. After listing, if the price trades below the issue price, the agent uses that account to buy shares in the market, which supports the price. If the price holds above the issue price, the agent does not need to buy, and the company issues fresh shares to settle the borrowing.
15%
Maximum over-allotment through a green shoe option, as a share of total issue size
Source: SEBI ICDR Regulations
What are the limits on a green shoe option?
SEBI caps both the size and the duration. The over-allotment cannot exceed 15% of the total issue size, and the stabilisation period runs for up to 30 days from the date the exchanges grant trading permission. The whole arrangement, including the stabilising agent's identity, is disclosed in the offer document, so it leaves a dated public trail. Source: SEBI ICDR Regulations.
Where does it fit among IPO mechanics?
A green shoe option is one of several tools disclosed in an IPO's paperwork. To read the rest of the process, see what is a DRHP and how to read a DRHP, and for the investors who anchor the book before the issue opens, see what is an anchor investor.
So a green shoe option is a capped, time-limited stabilisation mechanism, not a guarantee about where a stock will trade. Flock reads the public IPO and post-listing disclosures and keeps each one dated and sourced. What any of it means for your own decision is your call to make.
Frequently asked questions
What is a green shoe option?
A green shoe option, also called an over-allotment option, is a SEBI-permitted mechanism that lets an IPO issue extra shares beyond the base size to stabilise the price after listing. A stabilising agent buys shares in the market if the price falls below the issue price. Source: SEBI ICDR Regulations.
How many extra shares can a green shoe option cover?
Under SEBI ICDR rules, the over-allotment through a green shoe option cannot exceed 15% of the total issue size. The stabilising agent borrows these shares from promoters or pre-issue shareholders to over-allot them. Source: SEBI ICDR Regulations.
How long does price stabilisation last?
The stabilisation period runs for up to 30 days from the date the stock exchanges grant trading permission for the issue. During this window the stabilising agent can buy shares to support the price. Source: SEBI ICDR Regulations.
Who runs the green shoe option?
A stabilising agent, usually the lead merchant banker for the IPO, is appointed to manage the over-allotment and the stabilisation account. The arrangement is disclosed in the offer document. Source: SEBI ICDR Regulations.
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Disclosures shown are public regulatory filings. Data may be delayed or incomplete. Smart-money entities may no longer hold positions shown. Not investment advice.