Greenshoe Option

Group Members:
Harsh Singh
Jayant Mundhra
Mridul Aggarwal
Mudit Rajgarhia
Abhinav Bhandari
Atul Saraswat
 What is it ??
A provision in an underwriting
agreement that gives the underwriter
the right to sell investors more shares
than originally planned by the issuer.

Thiswould normally be done if the

demand for a security issue proves
higher than expected.

Mainlypracticed in US and European

Markets
 History
ØGreen Shoe Manufacturing
Company (now called Stride Rite
Corporation), founded in 1919.

ØFirst company to implement Green

Shoe Option in the underwriting
agreement.
 Greenshoe provision
üAllows underwritter to purchase an
additional 15% of the issue from the
issuer.

üAllows the issue to be oversubscribed

reffered as over allotment option.

üProvides price stability to a security

issue as the underwriter has the
ability to increase supply and smooth
out price fluctuations.
1. The underwriter works as a liaison (dealer),
finding buyers for the shares that their client
is offering.

3. Price for the shares is determined by the

sellers (company owners and directors) and
the buyers (underwriters and clients).

5. When the price is determined, the shares

are ready to publicly trade. The underwriter
has to ensure that these shares do not trade
below the offering price.
 How does it work ?
 Ifa company decides to publicly sell 1 million
shares, the underwriters can exercise their
green shoe 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.

 With Green Shoe Option provision

underwriters have the power to buy back the
shares at the same original offered price,
even if the market price is more. Thereby
 In opposite case if IPO trades below the
offering price (referred as break issue) to
stabilize share prices, the underwriters may
again buy back the shares.

 This enables underwriters to stabilize

fluctuating share prices by increasing or
decreasing the supply of shares according to
initial public demand.
How regular greenshoe option
works
 Underwriter has sold 115% of shares (15%
more).
The IPO price is set to be $10.

 Ifmrkt price falls to $8, underwriter does not

use the greenshoe. It buys back some or all
the shares at $8 in the market. Buying a large
bloc of shares stabilizes the price.

 Ifthe price grows to $12, the underwriter

exercises the option, buying shares from the
issuer at $10 and selling at $12 per share.
 Full and Partial
Greenshoes
The number of shares the underwriter buys
back determines if they will exercise a partial
greenshoe or a full greenshoe.

Ø A partial greenshoe is when underwriters are

only able to buy back some shares before the
price of the shares increases.

Ø A full greenshoe occurs when they are unable

to buy back any shares before the price goes
higher.
 Example
ØExxon initially offered 161.9m shs.
Subscriptions for 475.5m shs.
Used Green Shoe for additional
84.58m.

ØTata Steel was able to raise $150

million by selling additional
securities through the Green Shoe
option.