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News: The Food Corporation of India (FCI) is set to raise short-term debt of ₹50,000 crore from scheduled banks for a three-month tenure, with a green shoe option to mop up an additional ₹25,000 crore.
About Greenshoe Option
Source: Investopedia
- A green shoe option is a clause contained in the underwriting agreement of an IPO.
- This option permits the underwriters to buy up to an additional 15% of the shares at the offer price if public demand for the shares exceeds expectations and the shares trade above their offering price.
- It is also known as an over-allotment provision.
- Introduction in India: In India, the concept of green shoe option was introduced by the Securities and Exchange Board of India (SEBI) in the year 2003 to stabilize the aftermarket price of shares issued in IPOs.
- Working mechanism:
- It is primarily used at the time of IPO or listing of any stock to ensure a successful opening price.
- Accordingly, companies can intervene in the market to stabilise share prices during the first 30-day time window immediately after listing.
- This involves the purchase of equity shares from the market by the underwriting syndicate in case the share price falls below the issue price or goes significantly above the issue price.
- It acts as a price-stabilizing mechanism: It is considered to be good from the investor’s point of view as those companies which have a green shoe option in their IPO process have a built-in price stabilising mechanism, which will ensure the prices will not go below their offer price.
