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Green shoe option

Haritha (nthng) (45 Points)

01 November 2013

plz explain in detail Green shoe option???

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Poonam (CS,Mcom CA FINAL) (512 Points)
Replied 01 November 2013

A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO). Also known as an over-allotment provision, it allows the underwriting syndicate to buy up to an additional 15% of the shares at the offering price if public demand for the shares exceeds expectations and the stock trades above its offering price.

For Eg:As the underwriter has the ability to increase supply if demand is higher than expected, a green shoe option can create price stability during an IPO.

Some IPO agreements do not include greenshoe options in their underwriting agreements. This is usually the case when the issuer wants to fund a specific project at a pre-determined cost and does not want to be responsible for more capital than it originally sought.