General Studies

Topic – Financial Market

Sub Topic- -Primary Market- Price Stabilization Method

Relevance for Prelims and Mains

Green Shoe Option

·        A greenshoe option is an over-allotment option.

·        In the context of an initial public offering (IPO), it is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than initially planned.

Meaning of Underwriter

An underwriter is any party that evaluates and assumes another party's risk for a fee. Underwriters play a critical in many industries in the financial world, including the mortgage industry, insurance industry, equity markets, and some common types of debt security trading.

·        A Greenshoe option allows the group of investment banks that underwrite an initial public offering (IPO) to buy and offer for sale 15% more shares at the same offering price than the issuing company originally planned to sell.

·        If a company decides to sell 1 million shares publicly, the underwriters can exercise their greenshoe option and sell 1.15 million shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares.

·        A green-shoe option in IPOs was introduced by the Securities and Exchange Board of India in 2003 mainly to stabilise the after-market prices of shares. 

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Practice Question of Green Shoe Option-Click here