20 November 2014
Investors buy shares of companies in an initial public offering (IPO) in the hope that the shares would trade in the secondary market at a price higher than the original selling price. Investors would certainly be anxious if the price of the shares in the secondary market is highly volatile in the period immediately following the listing date. Such volatility is detrimental to investor confidence, to the image of the issuer company and the issue managers, and to capital markets at large. This necessitates some sort of price stabilisation mechanism. One such price stabilisation mechanism is the Green Shoe Option (GSO).
Green Shoe Options (GSOs), or over-allotment options, were introduced by the Securities and Exchange Board of India (SEBI), the Indian market regulator, in 2003 to stabilise the aftermarket price of shares issued in IPOs. A 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.
The objective of this mechanism is to reassure investors, especially small investors who are known as retail individual investors (RIIs), that they would have an exit route during the first 30 days after the listing of shares (called the GSO window period) at a price close to the issue price, due to the price Stabilising activity of the merchant banks. The issuer company also benefits from this mechanism, as enhanced investor confidence will result in more bids from investors at better prices.
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