Green Option Shoe Ques – Ans.
Q1. A listed company, Nishan Hitech Ltd. issued 10 lakh equity shares at a price of
Rs 150 per share. The company provided Green Shoe Option for stabilizing the
post listing price of the shares. On the day of listing of shares, the news of trade
war between the two developed, countries flashes and the price of shares of
company fall to Rs 110. Decide how many shares can be purchased by the
stabilizing agent to control the price ? State the provisions for balance money lying
in the special account for green shoe option. ( Dec 2018 – 5 Marks )
Answer :
As per regulation 45 (1) of the SEBI (ICDR) Regulations, 2009, the maximum number of
securities that may be borrowed for the purpose of allotment or allocation of securities in
excess of issue size shall not be more than 15% of the issue size. Therefore stabilizing
agent can purchase only 1.5 lakh equity shares to control the price.
The stabilizing agent shall remit the monies with respect to the specified securities
allotted to the issue from the special bank account known as GSO Bank A/c. Any money
left in the special bank account after remittance of monies to the issuer for securities
allotted and deduction of expenses incurred by the stabilizing agent for the sterilization
process shall be transferred to the Investor Protection and Education Fund established
by the SEBI and the special bank account shall be closed soon thereafter.
Q2. Raman Ltd. issued 50 Lakh equity shares at a price of Rs 200 per share. The
company provided Green Shoe Option for stabilizing the post listing price of the
shares. The issue was oversubscribed and it was decided that stabilizing agent
would borrow maximum number of shares permitted by SEBI (ICDR) Regulations.
Due to rise in price during Green Shoe Option period, only 5 Lakh shares could be
bought back at the price of Rs 180.
(I) Calculate the number of shares that the stabilizing agent needs to borrow in
this case at the time of allotment and explain the same with relevant
provisions.
(II) Explain the responsibility of Issuer Company in the above case with respect
to shortfall while exercising Green Shoe Option.
(III)State the amount to be transferred to Investor Protection & Education Fund.
( Dec 2020 – 5 Marks )
Answer :
(I) As per SEBI (ICDR) Regulations, 2018, the maximum number of shares that can
be borrowed by the stabilizing agent shall not be in excess of 15% of the issue
size.
In the given case, stabilizing agent can borrow 7.5 Lakh shares (15% of 50 Lakh
shares).
(ii) The issuer company would allot the differential 2.5 Lakhs shares into the Green
Shoe Demat Account to cover up the shortfall, and the Stabilising Agent would
discharge his obligation to the lending shareholder(s) by returning the 7.5 Lakhs
shares that had been borrowed from them.
The issuer company would need to apply to the exchanges for obtaining listing/
trading permissions for the incremental shares allotted by them, pursuant to the
Green Shoe mechanism.
(iii) The Amount which should be transferred to Investor Protection and Education
Fund will be calculated as follows :
= 5,00,000 (200-180) = `1,00,00,000
Q3. Good Luck Finance Ltd., a listed company issued 20 Lakh equity shares of
Rs180 each. The Company provided Green Shoe Option and Nishan was nominated
as Stabilizing Agent. On the date of listing, Corona Virus threat spread across the
globe.
Consequently post listing, the share price of the company fall to Rs 150.
From the above :
(i) Compute the quantum of shares that can be bought by Nishan.
(ii) State the provisions for balance of shares lying in the special account for
Green Shoe Option. ( June 2021 – 5 Marks )
Answer :
Green Shoe Option is a post listing price stabilising mechanism. Good Luck Finance Ltd.
issued 20 lakh equity shares@`180 each. As per SEBI (ICDR) Regulations, 2018, the
maximum number of securities that can be borrowed for the purpose of allotment/
allocation of securities in excess of issue size shall not be more than 15% of the issue
size.
Hence, Nishan (Stabilising agent) can purchase 3,00,000 equity shares (15% of
20,00,000 equity shares) to stabilise the price.
Having bought back all of the 300000 equity shares, these shares would be
temporarily held in a special depository account with the depository participant (Green
Shoe Demat Account), and would then be returned back to the lender shareholders,
within a maximum period of two days after the stabilisation period.
Any surplus lying in the Green Shoe Escrow Account would then be transferred to
the Investor Protection and Education Fund established by SEBI.
Q4. PRAKS Ltd. is planning for an IPO of 200,000 shares, at a book-built price of `
100 each, resulting in an IPO size of ` 200,00,000. As per the ICDR Regulations, the
over- allotment component under the Green Shoe mechanism could be up to 15%
of the IPO. Prior to the IPO, the stabilising agent would borrow such number of
shares to the extent of the proposed Green Shoe shares from the pre-issue
shareholders. These shares are then allotted to investors along with the IPO shares.
The total shares issued in the IPO therefore stands at 230,000 shares. IPO proceeds
received from the investors for the IPO shares, i.e. ` 200,00,000 being 200,000
shares at the rate of ` 100 each, are remitted to the Issuer Company, while the
proceeds from the Green Shoe Shares are parked in a special escrow bank account,
i.e. Green Shoe Escrow Account. During the price stabilization period, if the share
price drops below ` 100, the stabilising agent would utilize the funds lying in the
Green Shoe Escrow Account to buy these back shares from the open market. This
gives rise to the following three situations, examine all situations given below with
reference to the role of stabilising agent.
(a) Where the stabilising agent manages to buyback all of the Green Shoe
Shares, i.e., 30,000 shares;
(b) Where the stabilising agent manages to buyback none of the Green Shoe
Shares;
(c) Where the stabilising agent manages to buy-back some of the Green Shoe
Shares, say 20,000 shares. ( J 24 – NS – CF – 5 Marks each )
Answer :
(a) Where all Green Shoe Shares are bought back : In this situation, funds in the
Green Shoe Escrow Account (30,000 shares x `100 i.e ` 30,00,000) would be
deployed by the stabilising agent towards buying up shares from the open market.
Given that the prices prevalent in the market would be less than the issue price of
` 100, the stabilising agent would have sufficient funds lying at his disposal to
complete this operation.
Having bought back all of the 30,000 shares, these shares would be temporarily
held in a special depository account with the depository participant (Green Shoe
Demat Account), and would then be returned to the lender shareholders, within a
maximum period of two days after the stabilisation period.
(b) Where none of the Green Shoe Shares are bought back : This situation would
arise in the event that the share prices have fallen below the Issue Price, but the
stabilising agent is unable to find any sellers in the open market, or in an event
where the share prices continue to trade above the listing price, and therefore there
is no need for the stabilising agent to indulge in price stabilisation activities.
In either of the above-said situations, the stabilising agent is under a contractual
obligation to return the 30,000 shares that had initially been borrowed from the
lending shareholder(s). Towards meeting this obligation, the issuer company
would allot 30,000 shares to the stabilising agent into the Green Shoe Demat
Account (the consideration being the funds lying the Green Shoe Escrow Account),
and these shares would then be returned by the stabilising agent to the lending
shareholder(s), thereby squaring off.
(c) Where some of the Green Shoe Shares are bought back, say 20,000 shares :
This situation could arise in an event where the share prices witness a drop in the
initial stages of the price stabilization period, but recover towards the later stages,
generally after such purchase.
In this situation, the stabilising agent has a responsibility to return 30,000 shares
to the lending shareholder(s), whereas the stabilising activities have yielded only
20,000 shares.
Similar to the instance mentioned in Situation (b) above, the issuer company would
allot the differential 10,000 shares into the Green Shoe Demat Account to cover
up the shortfall, and the stabilising agent would discharge his obligation to the
lending shareholder(s) by returning the 30,000 shares that had been borrowed
from them.
In both Situation (b) and (c), the issuer company would need to apply to the exchanges
for obtaining listing/ trading permissions for the incremental shares allotted by them,
pursuant to the Green Shoe mechanism.
Any surplus lying in the Green Shoe Escrow Account would then be transferred to the
Investor Protection and Education Fund established by SEBI, as required under ICDR
Regulations and the account shall be closed thereafter.
