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Unit 3: Primary Market and Secondary Market

applicants. The book runner and other intermediaries should maintain records of the Notes
book-building process. The SEBI has the right to inspect such records.

3.2.8 Green Shoe Option

A Company making an initial public offer of equity shares can avail of the Green Shoe Option
(GSO) for stabilizing the post-listing price of its shares. The GSO means an option of allocation
of shares in excess of the shares included in the public issue and operating a post-listing price
stabilizing mechanism through a Stabilizing Agent (SA). The concerned issuing company should
seek authorization for the possibility. If allotment of further issues to the SA at the end of the
stabilization period together with the authorization for the public issue in the general meeting
of its shareholders. It should appoint one of the merchant bankers/book runners from amongst
the issue management team as the SA who would be responsible for the price stabilization
process. The SA should enter into an agreement with the issuer company, prior to the filing of
the offer document with SEBI, clearly stating all the terms conditions relating to GSO including
fees charged expenses to be incurred by him for this purpose. He should also enter into an
agreement with the promoter(s) or pre-issue shareholders who would lend their shares,
specifying the maximum number of shares that may be borrowed from them, but in no case
exceeding 15 per cent of the total issue size. The details of these two agreements should be
disclosed in the draft prospects, draft red herring prospectus, red herring prospectus and the
final prospectus. They should also be included as material documents for public inspection. The
lead book runner or the lead merchant banker in consultation with the SA would determine the
amount of shares to be over-allotted with the public issue within the ceiling specified above (i.e.
15 per cent of the issue size). Over-allotment refers to an allocation of shares in excess of the size
of the public issue made by the SA out of shares borrowed from promoters in pursuance of a
GSO exercised by the issuing company.

The draft prospectus draft red herring/red herring prospectus/final prospects should contain
the following additional disclosures:
1. Name of the Stabilizing Agent (SA)

2. Maximum number of shares as well as the percentage of the proposed issue size
3. Period for which the company proposes to avail of the stabilization mechanism
4. Maximum amount of funds to be received by the company in case of further allotment and
the use of these additional funds in final document to be filed with the ROCs
5. Details of the agreement/arrangement between the SA and the promoters to borrow
shares including, inter alia, (i) name of promoters, (ii) their existing shareholding,
(iii) number and percentage of shares to be lent by them, (iv) rights/obligations of each
party and so on
6. The final prospectus should additionally disclose the exact number of shares to be allotted
pursuant to the public issue, stating separately the number of shares to be borrowed from
promoters and over-allotted by the SA and their percentage in relation to the total issue
size.
In case of an IPO by an unlisted company/public issue by a listed company, the promoters
issuing shareholders holding more than 5 per cent shares may lend shares which are in debenture
form only. The SA would borrow to the extent of the proposed over-allotment. The allocation of
these shares should be on pro rata basis to all the applicants.
The stabilization mechanism would be available for the period disclosed by the company in
prospectus up to a maximum of 30 days from the date when the trading permission was granted
by the stock exchange(s).

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