A provision in an IPO that allows the underwriter to sell up to 15% more shares than planned if demand is strong, helping stabilise the stock price after listing.
A greenshoe option (formally called an over-allotment option) is a provision in an IPO underwriting agreement that gives the book running lead manager (BRLM) the right to sell up to 15% additional shares beyond the original offer size. Named after the Green Shoe Manufacturing Company (the first to use it in 1963), this mechanism serves to stabilise the stock price in the crucial post-listing period.
In India, SEBI's ICDR (Issue of Capital and Disclosure Requirements) regulations permit the use of a Green Shoe Option (GSO) for the purpose of price stabilisation. The mechanism works as follows: the company reserves up to 15% additional shares. The BRLM borrows these shares from a pre-identified shareholder (the "stabilising agent" shareholder). If the stock trades below the issue price after listing, the BRLM buys shares from the market using the over-allotment proceeds, supporting the price. If the stock trades above the issue price, the BRLM exercises the greenshoe and allots the additional 15% shares at the issue price.
Example: An IPO of 1 crore shares at Rs 500 each (raising Rs 500 crore) with a 15% greenshoe has an additional 15 lakh shares available. If post-listing the stock falls to Rs 450, the BRLM uses the Rs 75 crore (from over-allotment proceeds) to buy shares at Rs 450, stabilising the price. If the stock rises to Rs 600, the BRLM allots the additional 15 lakh shares at Rs 500, raising an extra Rs 75 crore for the company.
The stabilisation period in India is limited to 30 calendar days from the date of Allotment. During this period, the BRLM can only buy shares at or below the issue price — it cannot actively push the price above the issue price. Any shares purchased during stabilisation are returned to the lending shareholder. SEBI requires full disclosure of the greenshoe option in the prospectus, including the name of the stabilising agent and maximum number of additional shares.
While the greenshoe option provides a safety net for IPO investors, it is not a guarantee against losses after the stabilisation period ends. Several Indian IPOs have seen their stocks fall below issue price once the 30-day stabilisation window closed and the BRLM stopped supporting the price. Investors should evaluate the company's fundamentals for long-term holding decisions rather than relying on temporary price support mechanisms.
India Context
SEBI ICDR regulations permit up to 15% greenshoe. Stabilisation period: 30 days from allotment. BRLM can only buy at or below issue price during stabilisation. Must be disclosed in prospectus.