Summary of "Green Shoe Option"

Summary: Green Shoe Option

Definition

A greenshoe option is an over-allotment option used during an initial public offering (IPO). It allows the issuer to sell more shares than initially planned if demand exceeds supply.

Mechanism

For example, if a company plans to issue 100 shares but there is high demand, it can request permission from the regulator (e.g., SEBI in India) to issue additional shares (e.g., 30 extra shares).
This additional allotment helps meet excess demand.

Origin

The term “greenshoe” comes from the first company to use this option in 1919, Green Shoe Manufacturing Company.

Purpose and Benefits

Provides price stability during an IPO by allowing underwriters (investment bankers) to increase supply and smooth out price fluctuations caused by high demand.
Helps control severe price volatility when demand is unexpectedly high.
Ensures better price stability for the newly issued security.

Relevance

Greenshoe options are important for issuers and underwriters to manage IPO pricing and supply dynamics effectively.

No specific tickers, sectors, or instruments beyond IPO shares were mentioned. No explicit recommendations or cautions were provided. No disclaimers or financial advice statements were included.

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