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IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.

com

ISSN: 2347 - 7695

AN ANALYSIS ON GREEN SHOE OPTION WITH GRADE-5 (INDIA)


G. VILAS KUMAR MBA-II Year CMR Technical Campus Hyderabad, A.P. ABSTRACT The analysis has been focused on GSOs in comparison with Grade-5 in Indian primary market with the help of this analysis Risk Reward Ratios have been measured between Grade-5 and GSO companies. Volatility and GSO companies in India has been reduced successfully the investment bankers. Capital Asset Pricing Model (CAPM) has been applied on Grade-5 and GSO companies and it has been proven that Grade-5 companies created wealth to be long term investors.

Key Words: GSO, GRADE-5, RISK, CAPM.


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INTRODUCTION Introduced in 2003, Green Shoe Option is an overallotment mechanism permitted by the Securities and Exchange Board of India (SEBI) for stabilising the prices of newly-listed shares of companies immediately after listing. A commonly used tool in international capital market transactions, Green Shoe Option is used by investment bankers, acting as stabilising agents, to provide share price support to companies for a certain small period after their public offering. This term has been derived from the name of a company that first implemented this mechanism in its public offering in 1960 the Green Shoe Manufacturing Company (now Collective Brands Performance + Lifestyle Group, a subsidiary of Collective Brands Inc., USA). SEBI introduced the Green Shoe mechanism in Indian capital markets in 2003 vide a circular SEBI/CFD/DIL/ DIP/Circular No. 11 dated 14th August, 2003. Since then, a number of companies have implemented the Green Shoe Option in their initial public offering. Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines, which is granted to a company to be exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investor's perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market. A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option. A green shoe option can provide additional

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. The green shoe option provides stability and liquidity to a public offering. For example, a company intends to sell one million shares of its stock in a public offering through an investment banking firm (or group of firms, known as the syndicate) which the company has chosen to be the offering's underwriters. Stock offered for public trading for the first time is called an initial public offering or IPO. The green shoe (over-allotment) option would now come into play. The company had initially granted the underwriters the option to purchase from the company up to 15% more shares than the original offering size at the original offering price. By exercising their green shoe option, the underwriters are able to close their short position by purchasing shares at the same price for which they short-sold the shares, so the underwriters do not lose money. If the underwriters are able to buy back all of the oversold shares at or below the offering price (to support the stock price), then they would not need to exercise any portion of their green shoe option. If they are able to buy back only some of the shares at or below the offer price (because the stock eventually rises higher than the offer price), then the underwriters would exercise a portion of green shoe option to cover their remaining short position. If the underwriters were not able to buy back any portion of the oversold shares at or below the offering price ("syndicate bid") because the stock immediately rose and stayed up, then they would completely cover their 15% short position by exercising 100% of their green shoe option. OBJECTIVES 1. To measure the risk for the Green Shoe Option (GSO) and Grade-5 companies. 2. To compare the returns with primary market index and secondary market index in the window period. 3. To measure the volatility of the Green Shoe Option (GSO) companies for the window period. 4. To know the CAPM for Green Shoe Option (GSO) and Grade-5 companies its successful. SCOPE: The Nature of the present study is mostly explorative and descriptive. The analysis has been confined for the year 2004 to 2013. In Indian primary market till now 18 companies used green shoe option. The study has been limited to 5 grading companies. The analysis has been focussed to find the risk level and capital asset pricing model in the green shoe option used companies with grade 5 companies. LIMITATIONS 1. The Study is confined to 23 companies in the primary market. 2. Grade -5 IPO companies has been considered from 2007. 3. The calculation of CAPM, RBI repo rate has been considered as a risk free rate of returns. RFR has been considered according to the initial 30 days after listing. 4. Window period 30 days has been considered for all the GSO companies

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

LITERATURE OF REVIEW
Vasant Sivaraman, Shweta Singh and Jyoti Abrol: The experience of book build equity offerings and their post pricing trading history in India suggests mixed results. The case of Indraprastha Gas Ltd. might point to possible under pricing of the IPO. Despite a book build approach, if the concern on mispricing persists, it is likely that the green shoe option may be a remedy. Again, globally over allotment with the green shoe option has been a core tool of new issue management. The issuer needs to have a long-term perspective of a healthy relationship with the markets; nevertheless there is no reason for the issuer to leave excess upside on the table for new investors. Investors would understandably not wish to risk buying into a 'richly' priced offering since at the end of the day the performance of the fund has implications for both the fund manager as well as the sponsors. This note attempts to examine if the green shoe option, which has been introduced in India as a tool for book build issues since Aug 2003 (subsequently modified in May 2004), can play an effective role in the area of fair pricing of IPOs. PROF. (MS.) Prashanta Athma; MS. J. Anitha Rani: The Securities and Exchange Board of India (SEBI) has introduced Green Shoe Option (GSO) on 12 Aug 2003, in order to bring the Indian Primary Markets on par with global markets such as US, Canada and others where over 90 percent of the primary issues is through the Book-Building route having the GSO. One of the major beneficiaries of the GSO happens to be the investor as this option helps to preserve his capital as buying of excess shares limits panic selling in the market, as and when the stock gets listed on the bourses. SEBI introduced this option with a view to boost investors confidence by arresting the speculative force, which works immediately after listing and thus result in short term volatility in post listing price. It ensures price stability. The study is undertaken with an objective to highlight the importance of GSO, analyze the purpose for opting for GSO and to present the Companies opting for GSO in their IPOs since inception. The study is a conceptual one and based on Secondary Data. The Review of Literature is very scanty as GSO is still a developing concept. Hence the study is undertaken to look into the progress of number of companies opting for GSO since inception and the purpose for which the companies have opted for GSO. The study presents GSO Window Period analysis; GSO: Country-wise Analysis; GSO: Company-wise Analysis and GSO in IPO Analysis. It is found from the analysis that GSO though introduced in 2003 and nearing a decade, still it is in infantry stage in India. Very few companies have gone for GSO and reaped the benefit of price stabilization. It is high time that awareness programs are conducted to educate the companies about the importance of GSO. Naveen Alle: A green shoe option (GSO) provides the option of allotting equity shares in excess of the equity shares offered in the public issue as a post-listing price stabilising mechanism. This study examines whether companies need to include GSOs in their initial public offerings (IPOs), and explores the reasons for the indifference on the part of issuer companies and merchant banks in India towards GSOs. The aftermarket price performance of companies that included GSOs in their IPOs is analysed; however, the results of this analysis do not lead to any generalization due to the small number of companies that opted for GSO. Various suggestions such as making green shoe options mandatory, controlling occurrences of flipping by qualified institutional buyers, and so on are proposed by the author. Sarbapriya Ray: The primary market of shares and securities where Initial public offerings

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

(IPO) of securities are issued contributes a vital role in the financial development of an economy by means of mobilizing financial resources from the public and investing these resources in various developmental projects of the economy. Investors would undoubtedly be worried if the price of the shares in the secondary market is gradually declining or highly unpredictable in the period immediately following the listing date. The Green Shoe Option (GSO) is one of the price stabilization mechanisms newly came into force since 2003 by which such situation should be managed. This study attempts to assess the effectiveness of Green Shoe Option (GSO) as a technique of price stabilization in India by means of analyzing the mechanism through which GSO works. Financial Analysts Journal 1992 CFA Institute The over-allotment option allows underwriters to purchase up to 15% additional shares beyond the number of registered shares in an initial public offering (IPO). This option protects underwriters from potential losses resulting from overselling the IPO. The actual exercise patterns of these options in samples of closed-end-fund IPOs and industrial IPOs shows that underwriters rationally exercise the options when they are "in-the-money." Andreas Oehler / Marco Rummerb / Peter N. Smithc :The greenshoe option has become very popular in the German IPO market since its introduction in 1995 and is nowadays an important tool in issuing additional shares and for the underwriter to cover the short position arising from initial overallotment. We provide evidence that prize stabilisation due to secondary market purchases seems not to be very effective in propping up secondary market prices. Additionally, investors seem to decide quite early which firms are losers and which are winners in terms of stock market performance. The Green Shoe Option (GSO) is one of the price stabilization mechanisms newly came into force since 2003 by which the SEBI bring the Indian Primary Markets on par with global markets such as US, Canada and where over 90 percent of the primary issues is through the Book-Building route having the GSO.

Research Methodology
CAPM model that describes the relationship between risk and expected return and that is used in the pricing of risky securities of primary market.

Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

Standard Deviation: The standard deviation (represented by the Greek letter sigma, ) shows how much variation or dispersion from the average (mean, also called expected value) exists. A low standard deviation indicates that the data points tend to be very close to the mean; a high standard deviation indicates that the data points are spread out over a large range of values.

EMPIRICAL STUDY: 1. Green Shoe Option, 2. Window Period, 3. Grade 5, 4. IPO index 5. Nifty index, 6. Risk, 7. Volatility, 8. CAPM.

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

DATA ANALYSIS Companies list of GSO and GRADE-5 IPOs with windowperiod

Interpretation: SEBI had given permission not for the listed companies on GSO in the year 2003.The above table depicts the picture of GSO opted companies till 2013 are 18 number of companies, 5 companies got the Grade-5 rating from 2007 to 2013.

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

Analysis of risk on GSO with IPO index

Interpretation The above analysis of risk measurement in the GSO companies more or less than >1 in companies with the benchmark risk one of the aim of GSO is risk minimise the for the first 30 days. It has been observed that few companies got succeeded in minimising the risk.

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

Returns comparison with primary & secondary index

Interpretation The above analysis shows that listed companies performance in the 1st month is closely associated with the primary market index returns. Primary market is most influence than the secondary market with the above table it has been observe IPO index dominates more than the secondary market index (NIFTY) on newly listed companies.

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

Volatility and Windows Period on GSO & Grade-5 IPOs

Interpretation The above table shows the volatility of the companies which are into GSO and Grade-5 segments with these analysis it has been proven. The volatility for all the companies is less than < 1 proven the window period after listing in the secondary market. The aim of the GSO has been satisfied with this analysis.

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

CAPM analysis on GSO and GRADE-5 IPOs

Interpretation The above analysis the capital asset pricing model (CAPM) has been applied for the rating GSO companies and it has been owned with the analysis that only 3 companies are given positive performance were has rest of the all companies in GSO opted companies had show negative performance even Grade-5 companies had show negative performance which indicates that CAPM got failed in both the segments in the Indian primary market.

Note: House of Pearl Fashions Ltd changes to Pearl Global Industries Ltd. Deccan Chronicle Holdings and Pearl Global Industries Ltd shifted from NSE to BSE. For Cairn India, Idea Cellular and Electric steels Ltd RBI Repo rates (r f ) are calculated for one month only

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

Findings
1. It has been observed that GSO got failed to reduce the risk after listing in first month in India. 2. It has been found that GSO companies Returns are closely associated with Primary market returns influence of Secondary market Returns index is very less for the same period. 3. Volatility of the GSO companies the drastically got narrowed most of the company volatility is less than < 1 which shows that GSO companies succeeded in reducing volatility. 4. Capital asset pricing model (CAPM) got failed for the GSO companies in the Indian primary market. It has been found that not only GSO including Grade-5 companies got failed in CAPM.

Conclusion:
The analysis on GSO in India is nascent (starting) stage. Whereas only 18 companies utilized this option the purpose of these GSO is to stabilize the stock price and volatility between the periods of 30 trading days after listing. Through these option underwriter and primary market investor fund will be protected. Most of the companies in India which utilizes this option got succeed in terms of volatility and returns. Performance in GSO window period there is the scope further research to study on GSO impact on stock price movement in the first 30 trading days.

Suggestions:
1. 65% of the companies failed to create the wealth to the primary market investors in India due to various reasons effective utilization of GSO and the timing of the secondary market need to be considered by the issuers before going for an IPO. 2. There is a need to reduce the IPO processing period from 12 to 5days with these SEBI can remove the uncertainty of secondary market price movement impact on IPO listing price. 3. SEBI Need to be vigilant and proactive in protection of retail category 35% in the primary market. 4. I suggest IPO should be available for trading in pre-open sessions segment 9.00-9.30) only on the listing day. (i.e.

5. There is a need to improve the rating system for the primary market grading in India. The present grading system is not satisfying the investors capital protection. 6. Government regulator exchanges and the industries need to create awareness about the primary market investors to the small investors.(i.e. Retail category). 7. SEBI Need to monitor the Companies keenly which are having underwriter and GSO.

IRJA-Indian Research Journal, Volume: 1, Serious: 1. Issue: December, 2013 Online Available at www.indianresearchjournal.com

ISSN: 2347 - 7695

They need to improve the regulatory system for these kinds of options and approaches. 8. Discloses norms for the IPO companies need to be nationalized by the regulator to improve the quality Investment in primary market. BIBLIGOGRAPHY 1. AN INTRODUCTION TO INVESTMENT BANKS, HEDGE FUNDS . PAGE 61 BY DAVID STOWELL 2010 2. INVESTMENT BANKING: A GUIDE TO UNDERWRITING AND ADVISORY ... - PAGE 67 GIULIANO IANNOTTA 2010 INVESTMENT BANKING - PAGE 253 SUBRAMANYAM 2005. 3. BARRON'S S TOCKBROKER EXAMINATION - PAGE 102M ICHAEL T. CURLEY, J OSEPH A. WALKER 2007 4. HANDBOOK OF CORPORATE EQUITY DERIVATIVES AND EQUITY CAPITAL J UAN RAMIREZ 2011. 5. CAPITAL MARKETS LAW AND COMPLIANCE - PAGE 341NELSON 6. THE IPO OF HHLA - A CASE S TUDY - PAGE 32 DIRK HOLLANK, SARAH WALTER 2009 7. MANAGEMENT ACCOUNTING TEXT AND CASES - PAGE 321N. M. S INGHVI, RUZBEH J. BODHANWALA 2006. 8. UNITED S TATES SECURITIES LAW: A PRACTICAL GUIDE - PAGE 27J AMES MBARTOS 2006. 9. RAVI KAPOOR, SENIOR VICE-PRESIDENT, DSP MERRILL LYNCH, NEW IPO NORMS TO HAVE GSO Websites www.financial express.com www.moneycontrol.com www.NSEindia.com www.BSEindia.com www.journals.com www.RBI.com www.SEBI.com