The document discusses the green shoe option (GSO) process in an initial public offering (IPO). The key points are: 1) GSO allows underwriters to sell more shares than originally planned by borrowing additional shares, usually 15%, from existing shareholders like promoters. 2) If demand is high and the share price rises after listing, underwriters use borrowed shares to stabilize the price by purchasing shares in the market. 3) Over a maximum of 30 days, the underwriters work to stabilize fluctuations and return any unsold borrowed shares to the original shareholders, addressing any shortfalls through new share issuances.

1. Mr. Santanu Mallick
Assistant Professor, Department of Commerce,
Banwarilal Bhalotia College, Asansol

2. Process of GSO
• Green shoe option is a special provision in an IPO prospectus ,
which allows underwriters to sell more shares than originally
planned to issue in the market.
• E.g. Issue size = 1000 shares
over issue = 150 shares (15% of issue size)
Total Issue = 1150 shares

3. Process of GSO
Issue price =
Rs. 300
Increased in
the market &
becomes Rs.
380
Some small
investors will
sell their shares
to fetch profit
It leads to
increased
supply & fall
in demand,
ultimately
reduce price

4. Process of GSO
Merchant
Bankers
will
stabilize
the price
with
promoters
Merchant
Bankers
will borrow
shares
from
promoters
Allot to the
shareholde
rs
Finally
purchase
fro the
market
and
returns
to
promoter
s
If any
short
fall, then
new
shares
issue at
issue
price

5. Practical Example
Issue size is
1000 shares
Promoters 300
shares
Public
700 sharesMerchant bank
borrows from
promoters
 Issues price is 300
 Application comes for 1300 shares
 SEBI asked allots these oversubscription
 MB bankers borrows 15% of 1000
shares from promoters and allot to
public
 Total allotment to public becomes 700 +
150 = 850.
 Application money comes from 300 +
700 + 150 (extra) shares
 Extra 150 × 300 = 45,000 transfer to a
separate bank account

6. Issue size is 1000
shares
Promoters 300
shares
Public
700 shares + 150
shares
Merchant bank
borrows from
promoters
 Issues price increased to 380
 Small investors sell their shares
 it reduces market demand and price
becomes Rs. 290
 MB create market demand by buying
shares from the market i.e. 10 shares
 Share price falls further to Rs. 280,
then MB purchase further 100 shares
 This stabilization process is continued
for maximum 30 days
 MB purchased 10 + 100 = 110 shares
but borrowed 150 shares

7. Issue size is 1040
shares
Promoters 300
shares
Public
700 shares + 40
shares
Merchant bank
borrows from
promoters
 For any short fall, here it is 40 (150 –
110), company can issue new shares to the
promoters at issue price i.e. Rs. 300 as per
SEBI Provisions
 Company issues 40 new shares
 Out of 45,000 MB utilizes 2900 for 10
shares purchased, 28,000 for next 100
shares and 12,000 for new issue.
 45,000 – 2900 – 28,000 – 12,000 = 2,100
remain as balance
 SEBI ask to invest this balanced 2,100 to
Investors education and protection
fund(IEPF).