Leadership Styles – Autocratic, Laissez Faire, Participative and Bureaucratic
All leaders do not possess same attitude or same perspective. As discussed earlier, few leaders adopt the carrot approach and a few adopt the stick approach. Thus, all of the leaders do not get the things done in the same manner. Their style varies. The leadership style varies with the kind of people the leader […]
Cash Flow Types in Fixed Income Securities
The first thing that any investor related to fixed income markets first notices about the market is the sheer variety of the instruments being traded. A large variety also means that the trading in bonds becomes more complex. Investors need to understand the different types of fixed-income securities that are available in the market. Fixed […]
Scientific Management by Taylor
Fredrick Winslow Taylor ( March 20, 1856 – March 21, 1915) commonly known as ’Father of Scientific Management’ started his career as an operator and rose to the position of chief engineer. He conducted various experiments during this process which forms the basis of scientific management. It implies application of scientific principles for studying & […]
Ways for an Individual to Boost his/her Human Capital
Let us go through various ways by which an employee can boost his/her human capital. Every employee should strive hard to increase his/her value in the organization. One should contribute his/her level best to accomplish goals and objectives of the organization. Don’t just treat your organization as a mere source of earning money. Remember there […]
Costs Associated With Bankruptcy
In the previous article, we have studied about how some companies have started using bankruptcy strategically. This means that they use bankruptcy to discharge some of their debts if they are unable to meet their financial obligations. However, it needs to be understood that this discharge of debt does not happen without a cost. There […]
In many cases, IPOs are thought of as being underpriced. This means that as soon as the IPO is listed in the market, investor demand appears, and as a result, the price of the newly listed shares goes up. This is the situation that the issuing company, as well as the investment banker, wants to be in. This is because it creates customer satisfaction amongst the investment community, and they will be inclined towards buying into future issues by the issuing company as well as the investment banker.
However, in some cases, the prices of the newly issued shares start going down. This could be due to external factors such as the overall state of the economy. In such cases, investors often tend to be dissatisfied with the results. Hence, in order to prevent this, a strategy called the greenshoe option is exercised by the investment bankers. In this article, we will understand what the greenshoe option is and what is accomplished by utilizing this option.
Greenshoe option gives special powers to the “stabilizing agent” appointed by the issuing company. In most cases, the lead investment banker is appointed as the “stabilizing agent.” As per these powers, the investment banker has the option of issuing up to 15% additional shares as compared to the initial issue. This means that if the initial issue was determined to be for 10000 shares, the investment bankers could create as many as 1500 additional shares. Hence, a total of 11500 shares are issued to the retail investors in the market. These shares are also allocated to the investors on a pro-rata basis.
However, from the point of view of the company, the money received from the sale of 10000 shares is put into the equity account. On the other hand, the money received from the sale of these additional 1500 shares is kept in a separate stabilizing account. This account is not controlled by the company but is instead controlled by the investment banker. The idea is that the money in this account is to be kept as a reserve. If the price of the shares starts falling below the issue price, this money will be used by the investment bankers to start buying shares in the open market. This will lead to an increase in demand, which would mean that the price of the shares would also go up.
Before the company goes public, it would have to inform the investors that a greenshoe option has been given to the investment bankers. Also, it would have to mention the stabilization period for which this option is to be exercised. The stabilization period cannot exceed 30 days. This means that at the end of 30 days, the investment bankers will no longer be authorized to trade on behalf of the issuing company in order to stabilize their prices.
The greenshoe option begins by borrowing up to 15% additional shares from the promoters. The lock-in period regulations are not applicable to the greenshoe option. Hence, promoters can lend their shares even though they are within the lock-in period. The process can end in one of the three ways depending upon the market conditions:
A greenshoe option is a powerful tool in the hand of the investment banker. As seen above, the banker can use the money to buy back the shares in case of a short position. However, if the prices go on increasing, there is no compulsion for them to buy any shares and return the promoters. Thus, the investment banker is equipped to protect the company from attacks by bearish investors. The final decision regarding the quantum of shares to be bought back, as well as the price at which they have to be bought back, are left to the investment banker.
The bottom line is that the greenshoe option is an exceptional strategy which is used by investment banks to help the newly issued shares to be stabilized in the short run.
Your email address will not be published. Required fields are marked *
