Price Stabilizing Mechanism (Green shoe Option)
One of the main problems in an IPO has been the decrease of price after the issue as compared to the issue price. The Green shoe option will be the solution to the problemGreen Shoe Option, has been implementing for several years in international markets. In India it was popular incase of the Bonds issued by ICICI, IDBI, e.g.,Flexibonds, Safetybonds, etc.
Green Shoe Option (“GSO”) mean the issuing company can have an option to retain (up to a certain limit) the portion of over subscription to an issue of shares and to stabilise the post-issue price of the shares. Retail investors are protected by the GSO since many times the post-issue listing price is at a substantial discount to the offer price. This concept of allotment and stabilizing the Post issue price was initiated by the Green shoe Company. Later on in india Maruthi Suzuki and Tata Consultancy Services were also followed this and ICICI Bank was the 1st company to use the Green shoe Option under the Book Building Route DSP Merrill Lynch was appointed as the Stabilising Agent to maintain the post-issue price and for this the GSO was up to 15% of the issue size. Life Insurance Corporation was one of the major shareholders entered into an agreement with the Stabilising Agent to lend a stake equal to 7.85%
Terms Involved in Price Stabilising Machanism:
1. Issuing Company
2. Investors
3. Stabilizing Agent
4. Stock Exchanges
5. Stabilization Period
6. Green Shoe Option Bank Account
7. Green Shoe Option Demat Account
Issuing Company: It mean the company which is offering Public issue with Green shoe Option
Investors: General Public or Public financial institutions or Qualified Institutional Buyers or Anchor Investors who are interested to participate in the public issue
Stabilizing Agent: A Book Running Lead Manager will act as a Stabilising Agent for the Purpose of Price stabilizing Mechanism.
Stock Exchanges: the Secondary market where the shares of the company are to be listed after the public issue for trading.
Stabilization Period: 30 days from the on which the shares of the issuing company are allowed to trade on the Stock Exchanges.
Green Shoe Option Bank Account: the Stabililzing agent need to open a Bank account to make deposits by the investors for subscription for Green shoe Option. And it is to be closed after the completion of its purpose.
Green Shoe Option Demat Account: the Stabililzing agent need to open a Demat account to make Credits of shares purchased in Stock Exchanges in the process of price stabilizing machanism. And it is to be closed after the settlement of shares to the investors.
Process of Green Shoe Option:
Regulation 57 of SEBI (Issue of Capital Disclosure Requirements) regulations, 2018 will guide the Green shoe Option
The issuer Company have to authorize by a resolution passed in the general meeting of shareholders as approving the public issue to allot specified securities to the stabilising agent, if required, on the expiry of the stabilisation period.
The issuer Company have to appoint a lead manager as a stabilizing agent, who will be the whole responsible person for the price stabilisation process. The Stabilising Agent have to arrange the Required number of Collection centre all over the India. Prior to filing the draft offer document, the issuer company and the stabilising agent have entered into an agreement, stating all the terms and conditions relating to the Green Shoe Option including fees charged and expenses to be incurred by the stabilising agent for discharging its responsibilities.
Before filing the offer document, the stabilising agent has entered into an agreement with the promoters or pre-issue shareholders or both for borrowing specified securities from them in accordance with clause (g) of this sub-regulation specifying therein the maximum number of specified securities that may be borrowed for the purpose of allotment or allocation of specified securities in excess of the issue size (hereinafter referred to as the "over- allotment"), which shall not be in excess of fifteen per cent of the issue size; subject to clause (d), the lead manager, in consultation with the stabilising agent, shall determine the amount of specified securities to be over-allotted in the public issue;
The draft offer document and offer document shall contain all material disclosures about the green shoe option specified in this regard in Part A of Schedule VI.
In case of an initial public offer pre-issue shareholders and promoters and in case of a further public offer pre-issue shareholders holding more than 5% specified securities and promoters, may lend specified securities to the extent of the proposed over-allotment;
The amount left in the Green Shoe Option Bank account, if any, after this remittance towards the requirements of Price stabilizing Mechaninsm and deduction of expenses and net of taxes, if any, is transferred to the investor protection fund of the Stock Exchanges.
Reporting:
During the Stabilisation Period, the Stabilising Agent has to submit a report on the Price Stabilising Mechanism to the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) on a daily basis. The Stabilising Agent also has to submit a final report to Securities Exchange Board of India (SEBI) in the format Prescribed.