Definition
Over-Allotment
Over-allotment is the allotment of more shares than the base IPO size, exercised through the green shoe option to support the post-listing price.
When an IPO is over-allotted, the stabilising agent has sold up to 15% more shares than the company actually issued, creating a short position. If the share price falls after listing, the agent buys shares in the open market to cover this short, supporting the price; if it rises, the green shoe option is exercised so the company issues the extra shares.
In the Indian framework, over-allotment is governed by SEBI price-stabilisation rules and must be disclosed in the offer document. It is effectively a tool to smooth the first 30 days of trading.
Related terms
- Green Shoe OptionA green shoe option lets an IPO issuer sell more shares than originally planned — up to 15% extra — to stabilise the price after listing.
- 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.
- Stabilising AgentA stabilising agent is the entity, usually the lead merchant banker, responsible for operating the green shoe price-stabilisation mechanism after an IPO lists.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.