Definition
Green Shoe Option
A green shoe option lets an IPO issuer sell more shares than originally planned — up to 15% extra — to stabilise the price after listing.
Also called the over-allotment option, the green shoe allows the underwriter to allot additional shares (typically up to 15% of the issue) if demand is strong. In India this works through a price-stabilisation mechanism: a stabilising agent borrows shares from the promoter, sells the extra shares, and uses the IPO proceeds to buy back stock if the price falls below the issue price after listing.
The name comes from the Green Shoe Manufacturing Company, the first issuer to use it. SEBI permits the mechanism to dampen post-listing volatility; the stabilising agent operates for up to 30 days after listing.
Related terms
- Listing DayListing day is the first day an IPO's shares are admitted to trading on the stock exchange.
- Over-AllotmentOver-allotment is the allotment of more shares than the base IPO size, exercised through the green shoe option to support the post-listing price.
- Price StabilisationPrice stabilisation is the post-listing process where a designated agent buys shares to prevent an IPO's price from falling sharply below the issue price.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.