11 December 2008
What are the situations under which an underwriter likes to or can exercise the greenshoe option? Have there been any recent instances in the Indian IPOs?
THE term `green shoe' is derived from the fact that over-allotment option technique was first used in the initial public offer of securities of a company called The Green Shoe Company.
In international parlance, it is sometimes called an over-allotment option and again internationally, this provision gives either the members of a syndicate of underwriters to buy, or the issuer to sell, additional shares at the original offer price (even after the issue is closed)
In the Indian context, however, it has a limited connotation. An option or choice is vested in an issuer raising funds from the market (either debt or shares), to retain a portion of the additional amounts subscribed by the investors, and make the allotment, beyond the levels initially envisaged. SEBI guidelines governing public issues contain appropriate provisions for accepting over-subscriptions, subject to a ceiling, say, 15 per cent of the offer made to public.
A hypothetical case would be:
XYZ Ltd announces a public issue of 100,000 shares of Rs 10 each at par, payable fully on application. The company may receive applications for 200,000 shares. In other words, the response from the public has been encouraging, and the company may allot 1,15,000 shares (15 per cent above the initially indicated level), rather restricting the allotment to 1,00,000 shares. The fact that such an option would be exercised by the issuer will have to be brought out in the prospectus.
In certain situations, the green-shoe option can even be more than 15 per cent. Consider the following:
a) IDBI had come up earlier with their Flexi bonds (Series 4 and 5). This is a debt-instrument. Each of the series was initially floated for Rs 750 crore. SEBI had permitted IDBI to retain an excess of an equal amount of Rs 750 crore.
b) Similarly, ICICI had launched their first tranchè of safety bonds through unsecured redeemable debentures of Rs 200 crore, with a green-shoe option for an identical amount. In both these cases, the debt-issuer could raise additional funds at a given rate (prevailing at the material time), by exercising the green-shoe option.
c) More recently, Infosys Technologies had exercised the green-shoe option to purchase up to 782000 additional ADSs, representing 391,000 equity shares. This offer initially involved 5.22 million depository shares, representing 2.61 million domestic equity shares.
On the negative side, in a debt-issue with green-shoe option exercised, the debt-servicing ability of the issuer could come under severe pressure, even if the repayment is by raising fresh debt-capital at a future date. In the case of equity shares, an issuer planning to list a share at a given price, in the hope of a rise soon after listing, may (if the green-shoe option is exercised) find the share prices ruling at lower than expected levels — since, the denominator (number of shares) changes without a significant or corresponding change in the market expectations of total capitalisation.
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