Green Shoe Option in India An Analysis

APJEM
ArthPrabhand:AJournalofEconomicsandManagement
Vol.1Issue3,June2012,ISSN22780629
GREEN SHOE OPTION IN INDIA: AN ANALYSIS

PROF. (MS.) PRASHANTA ATHMA*; MS. J. ANITHA RANI**
*Head,
Department of Commerce,
Osmania University College for Women,
Koti, Hyderabad.
**Assistant Professor,
Department of Commerce,
Osmania University College for Women,
Koti, Hyderabad.
ABSTRACT
The Securities and Exchange Board of India (SEBI) has introduced Green Shoe Option (GSO)
on 12 Aug 2003, in order to bring the Indian Primary Markets on par with global markets such as
US, Canada and others where over 90 percent of the primary issues is through the Book-Building
route having the GSO.
One of the major beneficiaries of the GSO happens to be the investor as this option helps to
preserve his capital as buying of excess shares limits panic selling in the market, as and when the
stock gets listed on the bourses.
PinnacleResearchJournals28
http://www.pinnaclejournals.com
SEBI introduced this option with a view to boost investors confidence by arresting the
speculative force, which works immediately after listing and thus result in short term volatility in
post listing price. It ensures price stability.
The study is undertaken with an objective to highlight the importance of GSO, analyze the
purpose for opting for GSO and to present the Companies opting for GSO in their IPOs since
inception. The study is a conceptual one and based on Secondary Data.
The Review of Literature is very scanty as GSO is still a developing concept. Hence the study is
undertaken to look into the progress of number of companies opting for GSO since inception and
the purpose for which the companies have opted for GSO.
The study presents GSO Window Period analysis; GSO: Country-wise Analysis; GSO:
Company-wise Analysis and GSO in IPO Analysis.
It is found from the analysis that GSO though introduced in 2003 and nearing a decade, still it is
in infantry stage in India. Very few companies have gone for GSO and reaped the benefit of
price stabilization. It is high time that awareness programs are conducted to educate the
companies about the importance of GSO.
______________________________________________________________________________
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INTRODUCTION
The Securities and Exchange Board of India (SEBI) has introduced Green Shoe Option (GSO)
on 12 Aug 2003, in order to bring the Indian Primary Markets on par with global markets such as
US, Canada and others where over 90 percent of the primary issues is through the Book-Building
route having the GSO.
Ravi Kapoor1, senior vice-president, DSP Merrill Lynch, said, The amount raised in the form of
GSO will be used to stabilise the price of the stock post-listing, raising comfort levels of
investors (that price would be stabilised post listing) and encouraging increased participation
from investors.
One of the major beneficiaries of the GSO happens to be the investor as this option helps to
preserve his capital as buying of excess shares limits panic selling in the market, as and when the
stock gets listed on the bourses.
NEED FOR A GSO
Public Offerings may supply a large number of securities into a market, as a result of which,
there is a risk that the price of the securities will be highly volatile immediately after the
commencement of the offering. Price volatility is likely to be even greater in the case of an Initial
Public Offering (IPO) because there is no established Secondary Market for the securities.
The purpose of an issuer and/or a selling security holder in providing an underwriter with an
over-allotment is to allow the underwriter to stabilize the after-market for the issuer's securities
in the period immediately after the public offering begins. By allowing an underwriter to obtain
additional securities covering an over-allotment and to sell these securities to the public, an
underwriter can maintain a balance between the demand for an issuer's securities and the supply
of securities available to satisfy market demand.
The term comes from a company, Green Shoe Manufacturing Company, founded in 1919 which
made Wellington boots, now called Stride Rite Corporation, which was the first company to
permit underwriters to use this practice in its offering in US.
In a company prospectus, the legal term for the greenshoe is "over-allotment option", because in
addition to the shares originally offered, shares are set aside for underwriters. The Securities and
Exchange Commission (SEC) introduced this option in order to enhance the efficiency and
competitiveness of the fund raising process for IPOs.
SEBI introduced this option with a view to boost investors confidence by arresting the
speculative force, which works immediately after listing and thus result in short term volatility in
post listing price. It ensures price stability.
One of the benefits of using the greenshoe is its ability to reduce risk for the company issuing the
shares. It allows the underwriter to have buying power in order to cover their short position when
a stock price falls, without the risk of having to buy stock if the price rises. In return, this helps
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keep the share price stable, which positively affects both the issuers and investors. It is an
Investor Protection measure especially for the small investors during post-listing period.
It benefits the Underwriters in both bullish and bearish conditions. In bull market, underwriters
will opt for additional allotment of 15% due to index riding high. In a bearish market, the
underwriting option may not be exercised or the underwriters may buy upto 15% at prices lower
than the issue price from the market.
OBJECTIVES
The study is undertaken with the following objectives.
1. To highlight the importance of GSO.
2. To Analyse the purpose for opting for GSO.
3. To present the Companies opting for GSO in their IPOs since inception.
METHODOLOGY
The study is a conceptual one. However, the companies analysis is made with regard to the
number of companies which have opted for GSO since inception along with the purpose for
opting GSO.
The Study is purely based on secondary data, The sources of data include SEBI Annual Reports,
Offer Documents filed by the companies with the SEBI and mainly websites. To analyse the data
percentages are used.
REVIEW OF LITERATURE
Reena Aggarwal, in the article on Stabilization Activities by Underwriters after Initial Public
Offerings, The Journal of Finance, Volume 55, Issue 3, pg no. 10751103, June 2000, revealed
that more than half of IPOs, a short position of an average 10.75 percent of shares offered is
covered in 22 transactions over 16.6 days in the aftermarket, resulting in a loss of 3.61 percent of
underwriting fees. Underwriters manage price support activities by using a combination of
aftermarket short covering, penalty bids, and the selective use of the overallotment option.
Vasant Sivaraman, Shweta Singh & Jyoti Abrol, in their Shoe Option: Can It Mitigate
Mispricing? ICFAI Reader, November 2004 attempted to examine if the GSO, which has been
introduced in India as a tool for book build issues since Aug 2003 (subsequently modified in
May 2004), can play an effective role in the area of fair pricing of IPOs.
Naveen Alle1in GSOs in India, Student Research Project March 2012, analyzed the
aftermarket price performance of companies that included GSOs in their IPOs. However, the
results of this analysis do not lead to any generalization due to small number of companies that
opted for GSO. Various suggestions such as making GSOs mandatory, controlling occurrences
of flipping by qualified institutional buyers, and so on are proposed by the author.
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The Review of Literature is very scanty as GSO is still a developing concept. Hence the study is
undertaken to look into the progress of number of companies opting for GSO since inception and
the purpose for which the companies have opted for GSO.
PRICE STABILISATION MECHANISM
The mechanism by which the GSO works to provide stability and liquidity to a public offering is
described in the following example:
The price for the shares is determined by an agreement between the sellers (the companys
owners and directors) and the buyers (the underwriters and their clients). A part of the
responsibility of the lead underwriter in running a successful offering is to ensure that once the
shares begin to publicly trade, they do not trade below the offering price.
Step 1: Assume that the company wants to issue 100 shares and the price discovered through the
book-building mechanism is Rs 10 per share. The company has also made a provision of 15 per
cent GSO to the underwriters of the issue. This means, at the discretion of underwriters, the
company will further issue 15 shares at the same price of Rs 10 to the specific underwriter, who,
in turn, will act as the Stabilisation Agent (SA) for the issue. The option is valid only for a period
of one month post listing of the IPO. The amount raised by selling these 15 shares will be in the
escrow account, to which the underwriter has the access.
Step 2: On the closure of IPO, the underwriter issues 115 shares (minimum IPO size 100 shares).
The shares can be a loan from the promoter or any existing shareholder of the company.
Step 3: If the stock price goes up, Post listing, the SA is not required to stabilise the price and
will excercise the GSO, whereby the company will issue further 15 shares to the underwriter and
collect money for the same at the book-build price (offer price). In case the stock price goes
down below the issue price post-listing, then the underwriter uses the money from the escrow
account up to the extent of 15 shares to buy shares from the secondary market and the issue size
remains at 100 shares. The underwriter, in this case, returns the 15 shares to the lender.
GSO WINDOW PERIOD: AN ANALYSIS
GSO Window Period is a period of 30 days from the listing date. During this period, if the
closing price is below the offer price, then, the need for Price Stablisation arises. The Stabilising
Agent plays a role in stabilizing the price by using the amount from Escrow Account to purchase
the shares at the offer price or market price. Table 1 provides the number of days during which
the closing price was below the offer price and the number of trading days.
From the Table, it is clear that a majority of the companies (10) had more than 75% of days
when trading price was below the issue price during GSO window period, indicating the need for
Price Stabilisation. In case of 4 companies, the percentage is 100. This shows that, GSO will be a
boon to the Companies to stabilize the price.
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TYPES OF GSO
There are three types of GSO viz., Full, Partial and Reverse Greenshoes
The number of shares the underwriter buys back determines if they will exercise a partial
greenshoe or a full greenshoe. A Partial Greenshoe is when the underwriters are only able to buy
back some shares before the price of the shares increases. A Full Greenshoe occurs when they
are unable to buy back any shares before the price goes higher. At this point, the underwriter
needs to exercise the full option and buy at the offering price. The option can be exercised any
time throughout the first 30 days of IPO trading.
Reverse GSO has the same effect on the price of the shares as the regular GSO, but instead of
buying the shares, the underwriter is allowed to sell shares back to the issuer. If the share price
falls below the offering price, the underwriter can buy shares in the open market and sell them
back to the issuer.
GSO: COUNTRY-WISE ANALYSIS
GSO though first launched in US, later, the importance of GSO was felt and many countries have
introduced it. A comparison of GSO in US, UK, Germany and India is provided in Table 2.
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TABLE 1
GSO WINDOW PERIOD: AN ANALYSIs
No. Issuer Company
1 Tata
Consultancy
Services Ltd.
2 Deccan
Chronicle
Holdings Ltd.
3 3I Infotech Ltd.
4 HT Media Ltd.
5 Shree Renuka Sugars
Ltd
6 Entertainment
Network (India) Ltd.
7 Jagran Prakashan Ltd.
8 B. L. Kashyap & Sons
Ltd.
9 Prime Focus Ltd.
10 Parsvnath Developers
Ltd.
11 Cairn India Ltd
12 House of Pearl
Fashions Ltd.
13 Idea Cellular Ltd
14 Housing Development
& Infrastructure Ltd.
15 Omaxe Ltd
16 Brigade Enterprises
Ltd
17 Indiabulls Power Ltd.
18 Electrosteel Steels Ltd
Source: www.nseindia.com
Issue Listing Date

Price
850
25 Aug 2004
Days when
Closing
Price was
below Issue
Price
during
GSO
Window
Period
0
Trading
days
during
GSO
Window
Period
% of Days
when Trading
Price
was
below
Issue
Price
during
GSO
Window
Period
23
162
22 Dec 2004
17
22
77.27
100
530
285
22 Apr 2005
1 Sep 2005
1 Sep 2005
20
19
0
21
21
21
95.24
90.48
0
162
15 Feb 2006
20
320
685
22 Feb 2006
17 Mar 2006
19
0
19
18
100.00
0
417
300
20 Jun 2006
30 Nov 2006
23
0
23
21
100.00
0
160
550
9 Jan 2007
19 Feb 2007
21
20
21
20
100.00
100.00
75
500
9 Mar 2007
24 Jul 2007
0
4
19
22
0
18.18
310
390
9 Aug 2007
31 Dec 2007
4
21
21
23
19.05
91.30
45
11
30 Oct 2009
8 Oct 2010
20
18
20
21
100.00
85.71
APJEM
TABLE 2
GSO: COUNTRY-WISE ANALYSIS
Germany India
Facets
Regulatory
Authority
US UK Germany India US UK Germany India

US
SEC
GSO Window
Period
Around
calendar
days from
listing
day
short Widely used
Naked
position
Penalty bids
Allowed
UK
United
Kingdom
Financial
Services
14 Mandatorily, 30
calendar days
the from the listing
day
Germany
German Federal
Financial
Supervisory
Authority (FSA)
Customarily,
one
month from the
listing day
India
Securities and
Exchange Board
of India (SEBI)
Rarely used
Not allowed
Not allowed
Not Allowed
Not Allowed
Not Allowed
Mandatorily, 30
calendar days
from the listing
day
Extent
of Customarily, 15 15% of the issue 15% of the issue 15% of the issue
Overallotment
20% of the firm
size
size
size
commitment of
the
underwriters
Retention of
Allowed
Allowed
Allowed
Not Allowed
Profits
The Regulatory Authority in different countries has different nomenclature, in US
it is Securities Exchange Commission (SEC), in UK it is United Kingdom
Financial Services, Financial Supervisory Authority (FSA) in Germany and it is
Securities Exchange Board of India (SEBI) in India.
The GSO window period is 30 days in case of UK, Germany and India whereas it
is only 14 days in case of US, the first launcher of GSO in the world.
Naked short position is not allowed in Germany and India and it is rarely used in
UK though allowed whereas it is widely used concept in US.
The extent of overallotment is 15% of the issued size in case of all the countries
with a maximum tab of 20% in case of US.
Profit retention is allowed in all the countries except in India.
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GSO: COMPANY-WISE ANALYSIS

A list of the companies which have opted for GSO since inception along with the purpose for the
option and capital raised is provide in Table 3.
The first ever exercise of a GSO in case of a public issue was carried out by the ICICI
Bank and the LIC was the first institution to lend shares in the primary market, the DSP
Merill Lynch to ensure post listing price. Later, it was Infosys, House of Pearl Fashions
Ltd and Shariah Compliant Venture Capital Fund introduced GSO. Later, many
companies have opted for GSO having realized the advantage of price stabilization
through GSO.
The purpose of opting for GSO is mainly price stabilization post issue followed by
liquidity to meet the demand position for the securities, to meet the requirement for
investment and to repay the debt.
The main purpose for opting for GSO could also be due to the lack of confidence of full
subscription of shares in an IPO or Further Public Offer (FPO) and to scale down an IPO
size and retain the over-subscription amount.
TABLE 3
GSO: COMPANY-WISE ANALYSIS
Year
Company
Purpose
2003 ICICI Bank

2003 Infosys
underwriters
Tech
2003 House
of
Fashions Ltd
Pearl
2003 Shariah Compliant

Venture Capital Fund
Real Estate sector
called Secura India
RE Domestic scheme
2004 JM Morgan Stanley
Stabilizing Agent for
Tata
Consultancy
Services
2004 Deccan
Chronicle
Cash
Price of
GSO
Price Stabilisation post issue
Rs.
450
Crores
Offered 7.82 lakh secondary ADRs representing $294
3.91 lakh equity shares to boost the liquidity of the Million
ADRs
6,12,060 Equity Shares @550/- share the issue will Rs. 336.6
constitute 31.38% of fully diluted post issue equity Million
share capital not exercised and 33.52% in case GSO
exercised in full.
Price Stabilisation
INR 250
Million
exercised the GSO in full for 83,17,880 shares so Rs.

707
that TCS shares did not fall below the offer price of Crores
Rs 850
Price stabilization
Rs
19.47
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Holdings Ltd.
2005 ICICI Bank
2005
2005
2005
2005
2006
2006
2006
2006
2006
2006
2006
2007
2007
2007
2007
2007
2007
2008
Crores
Rs.
750
Crores
Jindal Saw Ltd
Initially wanted to raise term loan of $30 million $
40
with GSO of $10 million, but after the issue was Million
oversubscribed two times it retained GSO of $ 40
million
31 Infotech Ltd
Price stabilization
Rs.300
Million
HT Media Ltd
Price stabilization
Rs.368.88
Million
Shree Renuka Sugars Price stabilization
Rs.100
Ltd
Million
Dewan
Housing Investment
in
Indian
real
estate. Rs.
100
Finance
promoted
Crores
ArthVeda
Fund
Management
Entertainment
Price stabilization
Rs. 1.944
Network (India) Ltd.
Crores
Jagran
Prakashan Price stabilization
Rs. 48.18
Ltd.
Crores
B.L. Kashyap & Price stabilization
Rs. 17.12
Sons Ltd.
Crores
Prime Focus Ltd.
Price stabilization
Rs. 1500
Lakhs
Parsvnath
Price stabilization
Rs. 92.63
Developers Ltd.
Crores
Cairn India Ltd.
Price stabilization
Rs.528
Crores
Tata Steel Company Selling additional securities to meet demand $
150
position.
Million
House of Pearls Price stabilization
33.66
Fashions Ltd.
Crores
Idea Cellular Ltd.
Price stabilization
3,187.50
Million
Housing
Price stabilization
Rs. 2,228
Development
&
Million
Infrastructure Ltd.
Omaxe Ltd.
Price stabilization
Rs. 54.25
Crores
Brigade Enterprises Price stabilization
Rs. 97.25
Ltd.
Crores
Esso Unit of Exxon Sold an additional 84.58 million shares during its $
11.84
Mobil Corporation
IPO as demand surpassed supply by 3 times the Billion
Price stabilization
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2009 Real Estate PlayersSahara Prime City

9 Ambience
initial amount. Amount will be use for repaying debt

To stem volatility in share prices
9 DB Realty Plans
9 Lodha
Developers
2009 Indiabulls
Power Price stabilization
Ltd.
2010 Electro steel Steels Price stabilization
Ltd.
2010 Bank of Ayudhya
Price stabilization
2011 L&T Infrastructure
Finance, a fullyowned unit of Larsen
& Toubro
2011 Shriram
Transport
Finance
2012 United spirits
Price stabilization
Issued non-convertible debentures of Rs. 500 Crores

which has been oversubscribed by over 5 time
Company has a debt of Rs. 7700 Crore on its books,
some of it will be repaid by FCCB route
Compiled from the data available in the website: www.sebi.gov.in
Rs. 168.75
Crores
Rs.
150
Crores
Rs.
280
Crores
Rs. 161.1
Crores
Rs. 2.97
Crores
THB
8
Billion
Rs.
500
Crores
Rs.500
Crores
$
50
Million
GSO IN IPO: COMPANY-WISE ANALYSIS

Earlier, the GSO could be exercised only in bookbuilt IPOs. Now to extend the benefit of GSO,
the SEBI has permitted GSO in all IPOs to mitigate volatility and enhance investors
confidence.
The number of companies that opted for GSO in their IPO since inception is provided in Table 4.
From the listing date, GSO was exercised by the companies in order to see that
the price of the securities do not fall below the issue price after the listing of the
security.
Out of the 365 companies that made an IPO from Aug 2003 to Dec 2011 only 18
companies availed GSO facility in their IPO programme constituting 4.93%
It is in the year 2006 a major number of companies i.e., 6 companies have opted
for GSO out of 60 companies which have raised funds through IPOs accounting
to 10%
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TABLE 4
GSO IN IPO: COMPANY-WISE ANALYSIS
Year
2003
2004
No
3 0
21
2005
43
2006
60
2007
No. of Companies Opting GSO

IPOS
2008
86
30
Cos.
Opting
GSO
(%)
Issue Listing Date

Price
Name
2 1. Tata Consultancy
Services
2. Deccan Chronicle
Holdings Ltd.
3
1. 3I Infotech Ltd.
2. HT Media Ltd.
3. ShreeRenuka
4. Sugars Ltd
6 1. Entertainment
Network
(India)Ltd.
2. Jagran PrakashanLtd.
3. B.L Kashyap & Sons Ltd
4. Prime Focus Ltd.
5. Parsvnath Developers Ltd.
6. Cairn India Ltd.
5 1. Fashions Ltd.
2. Idea Cellular Ltd
3. Housing Development &
Infrastructure Ltd
4. Omaxe Ltd
5. Brigade Enterprises Ltd.
NIL
2009
17
1
2010
66
1
2011
39
Total
365
18
1.Indiabulls Power Ltd.

1.Electrosteel Steels Ltd.
NIL
0.00
9.52
850
25 Aug 2004
22 Dec 2004
6.98
10.00
5.81
162
100
530
285
22 Apr 2005
1 Sep 2005
1 Sep 2005
162
15 Feb 2006
320
685
417
300
160
550
75
500
22 Feb 2006
17 Mar 2006
20 Jun 2006
30 Nov 2006
9 Jan 2007
19 Feb 2007
9 Mar 2007
24 Jul 2007
310
390
9 Aug 2007
31 Dec 2007
45
11
30 Oct 2009
8 Oct 2010
0.00
5.88
1.51
0.00
4.93
The reasons for only 18 companies opting GSO out of 365 may be attributable to the following:
The GSO facility is restricted to 15% of overallottment & 30 days stabilization period
without the guarantee that this stabilization program would be successful. In these
circumstances, the fear of Retail Individual Investors would only increase.
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The issues where GSO is opted may not indicate the correct share prices and it will
deprive Value Investor from purchasing shares from other investors when the price
falls.
Merchant banks that are designated as Stabilising Agents get high fees for availing of the
GSOs. Such high fees for merchant banks were felt to be unjust as they face limited risk
in implementing GSOs.
The legal and regulatory compliances are burdensome, due to this, the issuer companies
and merchant bankers are not ready to take additional responsibility.
In a survey conducted by The Economic Times; a typical response was Unlike in the
US, SEBI does not permit merchant bankers to make money in trading. They will have to
buy the stock if the price falls below the offer price, but they are not allowed to sell even
if the stock value goes up. We are required to stabilise the price around the offer price for
which we get a fixed fee
CONCLUSION
GSO though introduced in 2003 and nearing a decade, still it is in infantry stage in India. A very
few companies have gone for GSO and reaped the benefit of price stabilization. It is high time
that awareness programs are conducted to educate the companies about the importance of GSO.
SUGGESTIONS
Awareness should be created amongst the Companies, Merchant Bankers and Investors about the
GSO and its importance.
GSO can be made mandatory in case of IPOs to benefit the Investors.

REFERENCES
1
Ravi Kapoor, senior vice-president, DSP Merrill Lynch, New IPO Norms To Have
GSO, www.financial express.com
www.investopedia.com
www.thehindubusinessline.in
www.financialexpress.com
www.moneycontrol.com
www.nseindia.com/contents/studentresearch

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GREEN SHOE OPTION IN INDIA: AN ANALYSIS

No. Issuer Company

Issue Listing Date

US UK Germany India US UK Germany India

GSO: COMPANY-WISE ANALYSIS

2003 ICICI Bank

2003 Shariah Compliant

exercised the GSO in full for 83,17,880 shares so Rs.

2009 Real Estate PlayersSahara Prime City

initial amount. Amount will be use for repaying debt

Issued non-convertible debentures of Rs. 500 Crores

GSO IN IPO: COMPANY-WISE ANALYSIS

No. of Companies Opting GSO

Issue Listing Date

1.Indiabulls Power Ltd.

GSO can be made mandatory in case of IPOs to benefit the Investors.

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