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Tuesday, August 2, 2011

What is Green Shoe Option?

Green shoe option is the provision which gives the issuer a right to sell more additional units (shares, NCDs or other debt instruments) to investors in case of the higher demand(over subscription).
In India, as per SEBI guidelines in case of debt instruments, green shoe option should not be more than the 100 % of the basic offer size.
Let’s take the current example of IIISL NCD, green shoe option is at most equal to the basic offer size of ì  375 crore.
In case of the previous offer of STFC NCD too, the green shoe option was at most equal to the basic offer size of  ì 500 crore.
In case of the equity,maximum permissible threshold for the green shoe option is 15%.
The term Green Shoe originated  from the fact that Green Shoe Manufacturing Company (now Stride Rite Corporation) was the first to come up  with such offer.
Green Shoe Option ensures the price stability of the unit (share or debt instrument) where issuer can increase the supply with burgeoning  demand.

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