Green Shoe Option in India

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RPS/06/2012

STUDENT RESEARCH PROJECT Green Shoe Options in India
Prepared by
Naveen Alle Batch 2012, Masters Programme in Management Studies Jamnalal Bajaj Institute of Management Studies (JBIMS) University of Mumbai Mumbai

Supervised by
Balkrishna Parab Assistant Professor Jamnalal Bajaj Institute of Management Studies (JBIMS) University of Mumbai Mumbai

March 2012

Student Research Project Green Shoe Options in India
Prepared by Naveen Alle1 March 2012

Abstract

A green shoe option (GSO) provides the option of allotting equity shares in excess of the equity shares offered in the public issue as a post-listing price stabilising mechanism. This study examines whether companies need to include GSOs in their initial public offerings (IPOs), and explores the reasons for the indifference on the part of issuer companies and merchant banks in India towards GSOs. The aftermarket price performance of companies that included GSOs in their IPOs is analysed; however, the results of this analysis do not lead to any generalization due to the small number of companies that opted for GSO. Various suggestions such as making green shoe options mandatory, controlling occurrences of flipping by qualified institutional buyers, and so on are proposed by the author.

1 Naveen Alle is a final-year student of the Masters Programme in Management Studies (MMS) at the Jamnalal Bajaj Institute of Management Studies. The author acknowledges the opportunity as well as the research grant provided by National Stock Exchange of India Limited and also acknowledges the constant support and guidance provided by Prof. Balkrishna Parab for the preparation of the paper. The student and the faculty acknowledge the valuable inputs of the following persons during the preparation of this paper: Nirmal Mohanty (NSE); Sajeev Kumar, Corporate Banking Division, Indian Bank; D. Venu, Vice President (Capital Markets Group), SBI Capital Markets Limited; Kishore Iyer, Assistant Vice President, Indbank Merchant Banking Services Limited; Hitesh Mandot, Senior Vice President (Corporate Finance and Investment Banking), Enam Securities Private Limited; Deepa Bahal, Senior Vice President and Head (Capital Market Execution), ICICI Securities Limited; B. Madhuprasad, Vice Chairman, Keynote Corporate Services Limited; and Satyajit Joshi, Vice President (Investment Banking), Kotak Mahindra Company Limited. The views expressed in the paper are those of the author and do not necessarily reflect the views of any of these other people or their organisations, or of JBIMS or of the NSE. The author can be contacted at naveenalle12@jbims.edu or navin.alle@yahoo.co.in.

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Green Shoe Options in India
I Introduction

The primary market for securities plays an important role in the economic development of a country, by enabling companies to mobilise financial resources from the public for undertaking various projects. The primary market also enables members of the public to invest their savings in gainful investment; it allows them to participate directly in the profits of the corporate sector. The fact that 91 companies raised capital to the tune of INR 67,609 crore in 2010–2011 is proof of this role of the primary markets. In 2009–2010, a total of INR 57,555 crores was mobilised by 76 companies.2 Investors buy shares of companies in an initial public offering (IPO) in the hope that the shares would trade in the secondary market at a price higher than the original selling price. Investors would certainly be anxious if the price of the shares in the secondary market is highly volatile in the period immediately following the listing date. Such volatility is detrimental to investor confidence, to the image of the issuer company and the issue managers, and to capital markets at large. This necessitates some sort of price stabilisation mechanism. One such price stabilisation mechanism is the Green Shoe Option (GSO). Green Shoe Options (GSOs), or over-allotment...
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