Green Shoe Option

“Green Shoe Option means an option of allotting equity shares in excess of the equity shares offered in the public issue as a post listing price stabilizing mechanism”A Green Shoe (sometimes "green shoe"), legally called an "over-allotment option" (the only way it can be referred to in a prospectus), gives underwriters the right to sell additional shares in a registered securities offering at the offering price, if demand for the securities exceeds the original amount offered. The greenshoe can vary in size up to 15% of the original number of shares offered.The greenshoe option is popular because it is one of a few SEC-permitted means for an underwriter to stabilize the price of a new issue post-pricing, and it presents no risk to the underwriter. Issuers will sometimes not permit a greenshoe on a transaction when they have a specific objective for the offering and do not want the possibility of raising more money than planned. The term comes from the first company, Green Shoe Manufacturing now called Stride Rite Corporation to permit underwriters to use this practice in its offering.

The SEC also permits the underwriters to engage in naked short sales of the offering. The underwriter creates a naked short position either by selling short more shares than the amount stated in the greenshoe option, or by selling short shares where there is no greenshoe option. It is theoretically possible for the underwriters to naked short sell a large percentage of the offering.The SEC also permits the underwriting syndicate to place stabilizing bids on the stock in the after-market. However, underwriters of initial and secondary offerings in the United States rarely use stabilizing bids to stabilize new issues, and instead engage in short selling the offering and purchasing in the after-market to stabilize new offerings.

"Recently, the SEC “staff has learned that in the US syndicate covering transactions have replaced (in terms of frequency of use) stabilization as a means to support post-offering market prices. Syndicate covering transactions may be preferred by managing underwriters primarily because they are not subject to the price and other conditions that apply to stabilization* Issuer Company use green shoe option mechanism during IPO to ensure that the shares price on the stock exchanges does not fall below the issue price after issue of shares.* The Green shoe option is exercised by a company making a public issue. A contract has been entered in relation to green shoe option with the existing shareholders (i.e. with promoters) before the public issue of shares.

* The guidelines require the promoter to lend his shares (not exceeding 15% of issue size) which is to be used for price stabilization to be carried out by a stabilizing agent (normally merchant banker or book runner) on behalf of the Company.* The stabilization period can be for a period of maximum period of 30 days from the date of allotment of shares to bring stability in post listing pricing of shares.* The company then goes on to make allotment, including over allotment, to the extent it has exercised the green shoe option.* Example - The entire process of a greenshoe option works on overallotment of shares.

Say, for instance, that a company is planning to issue only 100,000 shares, but in order to utilize the greenshoe option; it actually issues 115,000 shares, in which case the overallotment would be 15,000 shares. Please note that the company does not issue any new shares for the over-allotment.The 15,000 shares used for the over-allotment are actually borrowed from the promoters with whom the stabilizing agent enters into a separate agreement. For the subscribers of a public issue, it makes no difference whether the company is allotting shares out of the freshly issued 100,000 shares or from the 15,000 shares borrowed from the promoters. Once allotted, a share is just a share for an investor.

* For the company, however, the situation is totally different. The money received from the over-allotment is required to be kept in a separate bank account (i.e. escrow account).* The stabilizing agent start its process only after trading in the share starts at the stock exchanges.* In case the shares are trading at a price lower than the offer price, the stabilizing agent starts buying the shares by using the money lying in the separate bank account.

* In this manner, by buying the shares when others are selling, the stabilizing agent tries to put the brakes on falling prices.* The shares so bought from the market are handed over to the promoters from whom they were borrowed.* In case the newly listed shares start trading at a price higher than the offer price, the stabilizing agent does not buy any shares. * An issuer company making a public offer of equity shares can avail of green shoe option for * Stabilizing the post-listing price of its shares. * Possibility of allotment for the shares to the stabilizing agent at the end of stabilizing period.

* A company shall appoint one of the merchant bankers from amongst the issue management team, as a stabilizing agent who will be responsible for the price stabilization process.* The stabilizing agent (SA) shall enter into an agreement with the promoters or pre-issue shareholders who will be lend their shares specifying the max. no of shares shall not be in excess of 15% of total issue size.* The details of the agreement shall be disclosed in the draft prospectus, draft red herring prospectus, red herring prospectus and final prospectus.* Lead Merchant bankers by constitutions with stabilizing agent, shall determine the amount of shares to overalloted with public issue.* The draft prospectus, draft red herring prospectus, red herring prospectus and final prospectus shall contain following additional disclosures:-* Name of Stability agent.

* The maximum no of shares proposed to be overalloted by company. * The period for which the company propose to avail of the stabilizing mechanism. * The maximum increase in capital of company and the shareholding pattern, post issue, is required to allot for the shares to the extend of over allotment in the issue. * The max amount of fund to be received by company in case of further allotment and the use of these funds in final document to be filled with ROC.* In the case of initial public offer by the unlisted company, the promoter and the pre issue share holders or incase of listed company having shareholding more than 5 % shares , may lend the shares subject to provision of SEBI. The Stabilizing Agent shall borrow shares from the promoters or pre issue share holding to extend of proposed over allotment.

The allocation of these shares shall be on pro rata basis.* The stabilization mechanism shall be available for the period, which shall not exceed 30 days from the date of trading permission, was given by exchange(s).* The SA shall open a special account with the bank to be called Special Account for GSO proceeds of Company. For the money received from applicants against over-allotments in GSO shall be kept in GSO bank A/c for the purpose of buying shares from market during stabilization period, credited to the GSO Demat A/c(shares brought from markets by SA).* The share brought from market and lying in GSO Demat A/c shall be return to promoter immediately in any case not later than 2 working days after the close of the stabilization period.* The Prime-responsibility of SA shall be stabilizing post-listing price of share.

The SA shall determine the timing of buying the shares, quantity to be brought and the prices at which the shares are to be brought.* On the expiry of stabilization period, in case of SA does not buy shares, the issuer company shall allot shares to the extend of shortfalls in dematerialization form to GSO Demat A/c with in 5 days of closer of Stabilization period.* The shares returned to promoter shall be subject to remaining lock in period as applicable to promoters holding.* The SA shall remit an amount equal to issuer company from GSO Bank A/c.

The amount left in this account shall be transferred to investor’s protection fund.* The SA shall submit a report to stock exchange on daily basis during the stabilization period. The SA shall also submit a final report to SEBI in specified format. The SA and the company shall sign this report.

* The SA shall maintain the register in respect of each issue and must retained for the period at least 3 years from the date of end of stabilization period. The register contains * Each transaction effective.* Details of Promoters from whom the shares are to be brought. * Details of allotments.

* Open a special bank account which shall be the GSO Bank Account under the name of “Special Account for GSO proceeds of Prime Focus Limited” and deposit the monies received for the Over Allotment Shares, in the GSO Bank Account.* Open a special account for securities which shall be the GSO Demat Account under the name of “Special Account for GSO proceeds of Prime Focus Limited” and credit the Equity Shares bought by the Stabilising Agent, if any, during the Stabilisation Period to the GSO Demat account.* Stabilise the market price as per the SEBI Guidelines, only in the event of the market price falling below the Issue Price, including inter alia the determination of the price at which such Equity Shares are to be bought and the timing of such purchase.* On or prior to the Pricing Date, to request the Green Shoe Lender to lend the Loaned Shares and to transfer funds from the GSO Bank Account to Green Shoe Lender within a period of five working days of close of the Stabilisation Period.

* The Stabilising Agent, at its discretion, would decide the quantity of Equity Shares to be purchased, the purchase price and the timing of purchase. The Stabilising Agent, at its discretion, may spread orders over a period of time or may not purchase any Equity Shares under certain circumstances where it believes purchase of the Equity Shares may not result in stabilisation of market price.* Further, the Stabilising Agent does not give any assurance that would be able to maintain the market price at or above the Issue Price through stabilisation activities.* On expiry of the Stabilisation Period, to return the Equity Shares to the Green Shoe Lender either through market purchases as part of stabilising process or through issue of fresh Equity Shares by us.* To submit daily reports to the Stock Exchanges during the Stabilisation Period and to submit a final report to SEBI.* To maintain a register of its activities and retain the register for three years.* To transfer net gains on account of market purchases in the GSO Bank Account net of all expenses and net of taxes, if any, equally, to the investor protection funds of the Stock Exchanges.* On expiry of the Stabilisation Period, if the Stabilising Agent buys the Equity Shares from the market, to issue the Equity Shares to the GSO Demat Account to the extent of Over Allotment Shares, which have not been bought from the market.* If no Equity Shares are bought from the market, then to issue Equity Shares to GSO Demat Account to the entire extent of Over Allotment Shares.* The Green Shoe Lender undertakes to execute and deliver all necessary documents and give all necessary instructions to procure that all rights, title and interest in the Loaned Shares shall pass to the Stabilising Agent/GSO Demat Account free from all liens, charges and encumbrances.* Upon receipt of instructions from the Stabilising Agent on or prior to the Pricing Date, to transfer the Loaned Shares to the GSO Demat Account.* The Green Shoe Lender will not recall or create any lien or encumbrance on the Loaned Shares until the completion of the settlement under the stabilisation.* The primary objective of the Green Shoe mechanism is stabilization of the market price of Equity Shares after listing.* Towards this end, after listing of Equity Shares, in case the market price of the Equity Shares fall below the Issue Price, then the Stabilisation Agent, at its sole and absolute discretion, may start purchasing Equity Shares from the market with the objective of stabilization of the market price of the Equity Shares.* The Stabilizing Agent, at its sole and absolute discretion, would decide the quantity of Equity Shares to be purchased, the purchase price and the timing of purchase.* The Stabilization Agent, at its sole and absolute discretion, may spread orders over a period of time or may not purchase any Equity Shares under certain circumstances where it believes purchase of Equity Shares may not result in stabilization of market price.* Further, the Stabilization Agent does not give any assurance that would it be able to maintain the market price at or above the Issue Price through stabilization activities.* The funds lying to the credit of GSO Bank Account would be utilized by the Stabilization Agent to purchase the Equity Shares from the market and such Equity Shares would be credited to GSO Demat Account.