i

Minor Project Report

on

GREEN SHOE OPTIONS- A POST ISSUE STABILAZATION

MECHANISM.

By

Sohraab Teckchandani A0101912156

MBA Class of 2014

Under the Supervision of

Dr.S.k.Malhotra

Professor

Department of Finance

In Partial Fulfillment of the Requirements for the Degree of

Master of Business Administration

at

AMITY BUSINESS SCHOOL

AMITY UNIVERSITY UTTAR PRADESH

SECTOR 125, NOIDA - 201303, UTTAR PRADESH, INDIA

2012

ii

DECLARATION

Title of Project Report: Green Shoe Options: A post Issue Stabilization Mechanism.

I declare

(a)That the work presented for assessment in this Minor Project Report is my own, that it has not

previously been presented for another assessment and that my debts (for words, data, arguments

and ideas) have been appropriately acknowledged.

(b)That the work conforms to the guidelines for presentation and style set out in the relevant

documentation.

Date : …………… Sohraab Teckchandani

A0101912156

MBA Class of 2014

iii

C E RTI FI C ATE

T hi s i s t o hereby certify that SohraabTeckchandani student of Masters of Business

Administration at Amity Business School; Amity University Uttar Pradesh has completed the

Project Report on “Green Shoe Options: A post Issue Stabilization Mechanism” under my

guidance.

Mr. S.K Malhotra

Professor

Department of Fnance

iv

ACKNOWLEDGEMENT

First and foremost, I would like to thank my faculty guide, Prof. S.K. Malhotra, for allowing me

to undergo this project report under her guidance and supervision. It gave me an opportunity to

participate and learn about the various aspects of Finance.

I would also like to show my sincere gratitude & appreciation to my family and friends. Their

willingness to motivate me contributed tremendously to the project. I would also like to thank

them for guiding me with some examples that related to the topic of the project.

Finally, an honorable mention goes to Amity Business School, Amity University for their

understandings and supporting me in completing this project.

1

Table of Contents Chapter 1 ....................................................................................................................................................... 2

INTRODUCTION ............................................................................................................................................. 2

1.1 IPO- Initial Public Offering ................................................................................................................... 2

1.2 Process of IPO: .................................................................................................................................... 3

1.3 Rationale of Green Shoe Options: ...................................................................................................... 4

1.4 Types of Green Shoe Options: ............................................................................................................ 6

Chapter 2 ....................................................................................................................................................... 7

LITERATURE REVIEW ..................................................................................................................................... 7

2.1 Global Scenario of Green shoe options: ............................................................................................. 7

Chapter 3 ....................................................................................................................................................... 9

Research Methodology ................................................................................................................................. 9

Chapter 4 ..................................................................................................................................................... 10

Findings and Analysis .................................................................................................................................. 10

3.1 GSO IN INDIA: .................................................................................................................................... 10

3.2 The Process of GSO in India: ............................................................................................................. 11

3.3 Evaluation of Performance of GSO’s: ................................................................................................ 13

3.4 Grounds of Indifference towards GSO: ............................................................................................. 15

Chapter 5 ..................................................................................................................................................... 16

Suggestions & Recommendations .............................................................................................................. 16

REFERENCES .................................................................................................................................................. v

2

Chapter 1

INTRODUCTION

1.1 IPO- Initial Public Offering

IPO contributes a vital role in the financial development of an economy by means of mobilizing

financial resources from the public and investing these resources in various developmental

projects of the economy. In reality, IPO is the canal for new capital inflow to hatchling

companies, and simultaneously it is the mechanism for the existing owners to realize a return for

their efforts. The Investors generally invest in shares of companies through initial public offering

(IPO) with the optimism that the shares would be traded in the secondary market at a price

higher than the original selling price in order to have greater accessibility of growth.

Through IPO the public gets a chance to invest in the company and become the shareholders of

the company and the company is benefited by the money which is invested by the investors with

the issue of the shares which indeed helps in :

1- Growth of the company

2- Growth of the economy

3- Flow of Money in the market

4- Re-generation of money etc.

But when the IPO is launched in the secondary market where shares are traded, there can be huge

fluctuations in the price of the shares i.e. the stability of the price of the share can be disturbed

and investors can be largely benefited or can face losses by it. The day-to-day investors who buy

the shares for a short period of time can be largely disturbed with these fluctuations.

That is why GSO (GREEN SHOE OPTIONS) or over-allotment options were introduced by the

Securities and Exchange Board of India (SEBI), the Indian market regulator, in 2003 to stabilize

the aftermarket price of shares issued in IPOs. The term comes from a company, Green Shoe

Manufacturing Company, founded in 1919 which made Wellington boots, now called Stride Rite

Corporation, which was the first company to permit underwriters to use this practice in its

offering in US. In a company prospectus, the legal term for the greenshoe is "over-allotment

option", because in addition to the shares originally offered, shares are set aside for underwriters.

The Securities and Exchange Commission (SEC) introduced this option in order to enhance the

efficiency and competitiveness of the fund raising process for IPOs. The main objective of this

option is to re-assure the investors especially the small investors that they can exit the market

within the 30days of the issue at the price close to the issue price of the share, the company is

3

also benefited from the same as it gives a lot of confidence among the shareholders and thus a

trust is built among the investors especially the Retail Individual Investors (RII’s)

1.2 Process of IPO:

In order to understand the Green Shoe option one needs to understand about the process of IPO.

A company hires a merchant bank to access the number of shares that are to be issued in the IPO

and at what price they should be offered to the public. This is a tuff decision for the merchant

banker so by accessing all the parameters he comes to the final listing of the number of shares

and the price at which they are to be offered. Based on this advice, the company fixes a price

band (or a floor price) within which (or above which) the investors bid for the shares.

An IPO can be made through either of the Methods

1- Fixed price method,

2- Book building method,

3- Or a combination of both.

Fixed Price Method: When the issuer decides the price and mentions it in the offer

document then it is known as a fixed price method.

Book Building Method: when the price of an issue is based on the demand which is

received by the investors it is known as Book Building issue.

In a book built issue, the issuer company and the merchant bank solicit indications of

interest from institutional investors in order to construct a demand curve. Book building

is a process of price discovery. The issuer discloses a price band5 or floor price before

the opening of the issue of the securities offered.

Now at this stage the company and the merchant bank decide whether to go in for Green shoe

Options or not. This large depends on certain factors which are:

1- Confidence among the investors regarding the offer.

2- Confidence of the company and the merchant bank on the price of the shares.

3- The Market sentiment.

The prices of the shares are not determined by any rule rather they are just the interpretation of

the company and the merchant banker. The price is set in accordance where the demand exceeds

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the supply so that minimum requirement of 90% of the subscription is fulfilled at the first. that is

why book building issue is kept so that an anticipation of the price can be there among the

investors. The most important thing is that pricing of the shares and allocation rules are not

announced early on, but are left to the discretion of the issuer company and the merchant bank..

As the issue price is determined based on the bids received from the investors, it is fair to

Expect that the aftermarket price of the shares will hover around this price, at least in the short

run. In practice, it is observed that the aftermarket price is often significantly higher

(under pricing) or significantly lower than the issue price (overpricing). This indicates a

miscalculation in the pricing of the issue.

1.3 Rationale of Green Shoe Options:

After the prospectus is issued by the company, now the investors start bidding for the amount of

shares and the wait begins of the allotment which will be done to the investors by the issuer

company and the merchant banker. And after it is done the tension among the investors arise of

what the price of the issue is going to be at the first go.

If the market price immediately following the listing day is higher than the issue price, it implies

that the issue price was underestimated, a phenomenon known as under pricing. On the other

hand, if the market price immediately following the listing day is lower than the issue price, it

implies that the issue price was over-estimated, a phenomenon known as overpricing. From the

perspective of an investor, IPO under pricing as well as overpricing are worrisome. Under

pricing may appear beneficial to those investors who were actually allocated shares in an IPO.

However, the studies reveal that such shares perform badly in the long run, after initial positive

returns. Overpricing, which results in the shares selling at a price lower than the issue price, may

cause panic among the most vulnerable investors, the retail individual investors (RIIs).

The insertion of GSOs in the IPO program of an issuer company can be acceptable on the

following ground:

o Fear among the Small Investors.

o Merchant Banks Reputation

o Signaling Confidence

o Liquidity

o Favoring Preferred Investors.

1- Fear among small investors:

5

When the shares are issued in the secondary market there can be a disruption in the prices

of the shares and this can bring panic among the retail investors, this basically happens

due to 2 reasons:

Flippers- They are those investors who buy shares to sell them on the day of

listing itself thus it creates a haphazard situation in the price of shares.

Misjudgment of the price by the issuer company and the Merchant banker.

So with GSO being there the confidence is built up among the retail investors and other

investors too.

2- Merchant Banks Reputation:

If the Issue’s price falls in the market at the day of listing or in the period then all the

fingers are pointed towards the merchant bank’s performance as they are the ones who

evaluate the price and the amount of shares which are being offered.

Thus inclusion of GSO in the IPO programme makes a better reputation in the eyes of the

companies and the investors in the market. And so IPO’s offering are then directly related

with the merchant being involved.

3- Signaling Confidence:

Many investors, especially small investors, are usually unable to make up their minds

whether to bid or not to bid for the shares at the stated price band, as they stand to lose if

the price turns out to be unsustainable. In this context, the issuer company and the

merchant bank can signal confidence in the issue by availing of the GSO mechanism. By

so doing, the merchant banks back up their claims of the price being fair by proposing to

buy shares from the secondary market if their claims were to be disproved and the

aftermarket price were to fall below the issue price.

4- Liquidity:

All the investors want the market be as liquid as possible. Liquidity means that the shares

can be traded easily in the market without any disturbances, thus it is known that green

shoe options create that liquidity in the market as even if the price of the shares go down

during the GSO window period, the merchant banker can buy up the shares in the market

and keep the liquidity going which stabilizes the price of the share and brings liquidity in

the market.

The same happened in the case of Indiabulls power limited IPO, a total of 363,014,907

Were traded during the 30 day period and the stabilizing agent traded 29,847,654 shares

6

8.22% of the total trading volume.

5- Favoring Preferred Investors:

In some jurisdictions (especially in the US), merchant banks avail of the GSO so that

they can issue shares to some of their preferred clients,who often happen to be

institutional investors. During the planning phase of IPOs, merchant banks go on a road

show, meeting institutional investors and other sophisticated investors, in order to gauge

the potential demand for the IPO and the price at which the shares could be sold. The

merchant bank then makes a favorable allotment to such institutional investors.

1.4 Types of Green Shoe Options:

Partial Green shoe option

Full Green Shoe option &.

Reverse Green shoe option.

The number of shares the underwriter buys back determines whether they will exercise a partial

green shoe or a full green shoe. A partial green shoe is adopted when underwriters are only able

to buy back some shares before the price of the shares increases. A full green shoe occurs when

they are unable to buy back any shares before the price goes higher. At this point, the

underwriter needs to exercise the full option and buy at the offering price. The option can be

exercised any time throughout the first 30 days of IPO trading. There is also the reverse green

shoe option. This option has the same effect on the price of the shares as the regular green shoe

option, but instead of buying the shares, the underwriter is allowed to sell shares back to the

issuer. Under the Reverse Option, in the event that there is a fall in the share prices during the

stabilization period, the stabilizing agent would procure shares from the open market at the

depressed prices, and sell them back to the issuer at the (higher) issue price. Procurement of large

blocks of shares from the open market while exercising Reverse Green Shoe would assist in

stabilizing the falling share prices.

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Chapter 2

LITERATURE REVIEW

As India stands at the 9th

positions in largest IPO Market in the world as per Thomson financial,

worlds leading research and information companies, shows India capturing 3.3% of the global

share in the IPO market in 2010 as compared to 1.3% in the last year. India has grown

tremendously in the past years and with the introduction of Coal India and Power grid IPO India

has gained position in the global markets. (Mydigitalfc.com, 2010).

So that is why GSO becomes a very important matter that should be included in the IPO’s of the

firm for the price stabilization at the time of listing of shares as the price of the shares are likely

to go up or down on the listing day. From the perspective of an investor, IPO under pricing as

well as overpricing are worrisome. Under pricing may appear beneficial to those investors who

were actually allocated shares in an IPO. However, (Jenkinson and Ljungqvist, 2001) reveal that

such shares perform badly in the long run, after initial positive returns.

As the overpricing and under pricing can be worrisome or in other words the disruption in the

price of share at the time of listing can create a lot of panic among the investors, which is done

by the flippers who sell their shares at the day of listing itself thus creating a disturbance in the

prices, (Aggarwal, 2003) argues that GSOs can counteract the sales pressure generated by

flippers.

As the merchant bankers are the one who decides the number of shares and their price, so if

anything goes wrong at the time of listing which leads in price fluctuation then merchant bankers

are the one to be blamed and thus their reputation is also at stake. In the US, (Beatty, R. and

Ritter, J. R., 1986)) found that the market share of merchant banks (underwriters) fell

significantly after the issues managed by them fared poorly in the aftermarket. Merchant banks

can prevent such a loss of reputation by availing of the GSO mechanism, and trying to prop up

the price of the share if it were to fall below the issue price in the immediate aftermarket.

2.1 Global Scenario of Green shoe options:

GSO in US:

8

In the US, it is very common for companies to include the GSO, officially known as the

overallotment option, for stabilizing the aftermarket price. The US Securities and Exchange

Commission (SEC) define price stabilization as “…transactions for the purpose of preventing or

retarding a decline in the market price of a security to facilitate an offering.”

The Securities and Exchange Commission (SEC) of USA has introduced Green shoe option way

back in the year 1930. (Malhotra, 2010) Says In USA around 75-80% of the companies involve

GSO in their IPO programmes.

(Aggarwal R. , 2000) Identifies three kinds of over-allotment mechanisms prevalent in the US:

(a) Pure stabilization;

(b) Aftermarket short covering bid; and

(c) Penalty bid.

GSOs in the UK

The Committee of European Securities Regulators (CESR) provides a broad framework of GSO

regime to be followed by its member states. The responsibility for GSOs lies with the

investments services firms, called stabilizing managers. The possibility of stabilization is

required to be disclosed in the prospectus, and stabilization activity must be recorded and

disclosed in an appropriate manner (CESR, 2002). The GSO regime in the UK allows an issuer

company to over-allot shares to the maximum extent of 15%; the stabilizing activity may be

carried out for a maximum period of 30 days after listing (the GSO window period). However,

the regulations explicitly mandate only a partial GSO, i.e., the stabilizing agent can only buy the

shares in the aftermarket at a price lower than or equal to the issue price. Further, an explicit

disclosure has to be made to the effect that although a claim is made that stabilization may be

undertaken, there is no assurance that it will in fact be undertaken, and that it may be stopped at

any time.

GSOs in Germany

In Germany, the GSO, known as an Over-Allotment Arrangement (OAA), involves the merchant

banker borrowing shares from pre-issue shareholders or directly from the issuer company. The

merchant banker is required to return the shares within a fixed period of time, usually one month.

Any profit resulting from the price stabilization activity can be retained by the merchant banker.

Green shoe options are very popular in the German Neuer Markt, which is similar to the

NASDAQ in the US. (Franzke, S. A. and Schlag, C., 2003) report that during 1997–2002, it was

rare to find an IPO in the Neuer Markt that did not include an OAA.

9

Chapter 3

Research Methodology

The research technique of the paper followed is exploratory in nature. As part and parcel of

completion of this report several research papers were read, to facilitate ascertaining following

objectives:-

To study and analyze conduct the Green Shoe Option in India.

To ascertain the road ahead for this unusual vehicle in Indian context, its scope and

associated particulars.

To gauge the usage of GSOs In pretext of Indian companies capitalizing the same.

It was observed during the course of completion that out of 365 Initial Public Offerings(IPOs)

Since 2003, only 18 companies exercised foretasted option for post issue price stabilization.

Which furthermore produced an opportunity to study the vehicle since Usage was limited to a

meager proportion, it being such an expedient model to safeguard the interest of investors and for

the company to utilize the excess capital. Thus, making it mutually beneficial for all its

stakeholders.

10

Chapter 4

Findings and Analysis

3.1 GSO IN INDIA:

In, India Green shoe options were introduced on 14th

august 2003 by Securities and Exchange

Board of India(SEBI), the green shoe option is not very popular in India as it was approved by

SEBI very late as compared to other US and European Countries.

As in India retail investors are in large numbers thus we wanted a price stabilization mechanism

to come to protect the interest of investors and safeguard their money, that’s when GSO was

introduced. The companies which have exercised GSO option in India are as follows.:

No. Issuer Company Opening Date Listing Date

S.No. Issuer Company Opening Date Closing Date

1 Tata Consultancy Services Ltd. 29 July 2004 25 august 2004

2 Deccan Chronicle Holdings Ltd. 25 November 2004 22 December 2004

3 3I Infotech Ltd. 30 March 2005 22 April 2005

4 HT Media Ltd. 4 August 2005 1 September 2005

5 Shree Renuka Sugars Ltd 7 October 2005 1 September 2005

6 Entertainment Network (India) Ltd. 23 January 2006 15 February 2006

7 Jagran Prakashan Ltd. 25 January 2006 22 February 2006

8 B. L. Kashyap & Sons Ltd. 20 February 2006 17 March 2006

9 Prime Focus Ltd. 25 May 2006 20 June 2006

10 Parsvnath Developers Ltd. 6 November 2006 30 November 2006

11 Cairn India Ltd. 11 December 2006 9 January 2007

12 House of Pearl Fashions Ltd. 16 January 2007 19 February 2007

13 Idea Cellular Ltd. 12 February 2007 9 March 2007

14 Housing Development &

Infrastructure Ltd.

28 June 2007 24 July 2007

15 Omaxe Ltd. 17 July 2007 9 August 2007

11

16 Brigade Enterprises Ltd. 10 December 2007 31 December 2007

17 Indiabulls Power Ltd. 12 October 2009 30 October 2009

18 Electrosteel Steels Ltd. 21 September 2010 8 October 2010

Table 1: List of Companies that Opted for GSOs in their IPOs in India.

3.2 The Process of GSO in India:

The GSO process involves the appointment of a merchant bank as a stabilizing agent (SA) by the

issuer company; the SA enters into an agreement with promoters or other pre-issue shareholders

to ‘borrow’ a certain number of shares from them. Pre-issue shareholders are usually the

promoters or other individuals who were already holding shares in the company at the time of the

IPO. The details of such an agreement have to be disclosed in the offer document. The extent of

borrowed shares is restricted to 15% of the issue size. The issuer company needs to pass a

shareholder resolution for availing the GSO, for appointing a stabilizing agent, and for carrying

out the market stabilizing activity in the aftermarket. The shares borrowed from the pre-issue

shareholders are allotted together with the shares being issued in the IPO; thus, the SA obtains

the funds that need to be deposited in a separate bank account, known as the GSO bank account.

In case the market price of the shares falls below the issue price during the GSO window period,

the SA can buy shares from the market with these funds. The GSO window period refers to 30

calendar days from the date of listing, during which time the stabilizing activity can be carried

out. The shares bought by the SA are kept in a separate dematerialized account, known as the

GSO demat account. It is implied that the SA would sell the shares that were bought previously,

if the market price rises significantly. In this regard, the SA has full discretion about the quantity,

price, and timing of buying or selling. This stabilizing activity is allowed for a maximum period

of 30 days after listing.

At the end of the stabilization period, the SA would be left with a balance of cash, or shares, or

both. If the aftermarket price did not fall below the issue price, the SA would not have engaged

in any trading activity. In such cases, the SA would be left with cash proceeds from the over-

allotment, which would be handed over to the issuer company. The company would then issue

fresh shares to the promoters or other pre-issue shareholders from whom the SA had initially

borrowed the shares.

If the aftermarket price of the shares fell below the issue price during the first 30 days after

listing, the SA would buy shares from the market with the cash at its disposal. This activity

would result in the SA having some shares in the GSO demat account, and/or cash. If the SA is

left with the exact number of shares that it had borrowed from the promoters or other pre-issue

shareholders, it would return the same to them. However, if the number of shares at the disposal

of the SA is less than the number of borrowed shares, it would pay the issuer company to allot

12

new shares to fill the shortfall. It is also possible that the SA is left with more shares than it had

borrowed. The SEBI (ICDR) Regulations, 2009 (henceforward referred to as the SEBI

Regulations) are silent about this possibility; it is expected that the SA would conduct its buying

and selling programme in a manner that would ensure that such an eventuality did not occur. If

any cash is left with the SA, this has to be transferred to the Investor Education and Protection

Fund (IEPF) set up by the SEBI, after deducting reasonable expenses incurred by the SA.

A notable feature of the regulation of GSOs in India is the invocation of the doctrine of unjust

enrichment; according to this, neither the issuer company nor the promoters or pre-issue

shareholders can derive any profit from the stabilizing activity. The profits, if any, would be used

for protecting and educating investors. Another notable feature of the regulation of GSOs in

India is that it is optional; it is left to the discretion of the issuer-company.

Year Number of IPO’s Number of companies

opting for GSO

Percentage of

Companies opting for

GSO’s

2003 3 0 0

2004 21 2 9.52%

2005 43 3 6.98%

2006 60 6 10%

2007 86 5 5.81%

2008 20 0 0

2009 17 1 5.88%

2010 66 1 1.51%

2011 39 0 0

Total 365 18 4.93%

Table 2- Number of Companies that Opted for GSOs in their IPOs in India.

As we can see from the above tables that out of the 365 IPO’s since 2003 to 2011 only 18 IPO’s

have opted for GSO’s and rest have not, thus making it very clear that Indian market is not

mature enough to go in for green shoe options, As the companies are not very much in favor of

it.

As we can see from the above data that in the year 2003 when it was the options were approved

by the Securities exchange board of India (SEBI), nobody opted for it but as the time passed the

13

next year itself 9.52% of the companies went for it i.e. Tata Consultancy Services and Deccan

chronicles ltd and has been reducing by then.

3.3 Evaluation of Performance of GSO’s:

GSO’s performance can be evaluated by three modes:

1- LDR: Listing Day Return

2- MDR-Mean Daily Return

3- The Number of days when the closing price of shares was below the issue price.

LDR is the first day return of the share i.e. how does the share performs on the first day, this

mode is significant because every stakeholder has a keen interest on it and even for the

performance of flippers.

LDR = (Pcld / Ip) – 1……………

Pcld is the price at the closing day.

Ip is the issue price.

As we know that first day performance cannot determine about how the stock will perform in the

future days , thus MDR is calculated which is know as Mean Daily Return for the first 30 days of

GSO window period.

MDR = 1/n E(ln (Pt/Pt-1))

Pt is the closing price of the company’s share on each of the trading days during the

GSO window period.

Pt-1 is the previous day’s closing price.

N is the number of trading days during the GSO window period.

No. Issuer Company Opening Date Listing Date

S.No. Issuer Company Listing Day LDR MDR

1 Tata Consultancy Services

Ltd.

25 august 2004 16.23% 0.83%

14

2 Deccan Chronicle Holdings

Ltd.

22 December 2004 4.44% -

3 3I Infotech Ltd. 22 April 2005 -1.90% 0/04%

4 HT Media Ltd. 1 September 2005 5.06% -

5 Shree Renuka Sugars Ltd 1 September 2005 95.37% 1.91%

6 Entertainment Network

(India) Ltd.

15 February 2006 63.40% 1.59%

7 Jagran Prakashan Ltd. 22 February 2006 - -

8 B. L. Kashyap & Sons Ltd. 17 March 2006 42.09% 3%

9 Prime Focus Ltd. 20 June 2006 - -

10 Parsvnath Developers Ltd. 30 November

2006

75.47% 2.03%

11 Cairn India Ltd. 9 January 2007 - -

12 House of Pearl Fashions Ltd. 19 February 2007 - -

13 Idea Cellular Ltd. 9 March 2007 14.27% 1.24%

14 Housing Development &

Infrastructure Ltd.

24 July 2007 11.87% 0.12%

15 Omaxe Ltd. 9 August 2007 12.69% 0.35%

16 Brigade Enterprises Ltd. 31 December 2007 -2.59% -

17 Indiabulls Power Ltd. 30 October 2009 - -

18 Electrosteel Steels Ltd. 8 October 2010 2.27% -

Table 3: Performance of Companies that Opted for GSOs in India from August 14, 2003 to December 31, 2011. Seven of these companies posted a negative return on the listing day. The MDRs of ten of the 18

companies were negative; even after the MDRs were adjusted for market returns This indicates

that the average return of these companies’ share price were not only below the issue price, but

also below the issue price after adjusting their returns for the changes in the market portfolio, i.e.,

S&P CNX Nifty.

15

3.4 Grounds of Indifference towards GSO:

As we know that green shoe options are there to reassure investors on their investments made in

the capital market, especially the RII’s .then (Alle, 2012) shares point of indifferences towards

GSO’s:

1- Will the GSO really work:

Nobody is sure, neither the issuer company nor the merchant bank that the Green Shoe

option will be successful in stabilizing the price of the share or not to protect the interest

of investors. Thus there is a point of indifference against GSO.

2- Undue Advantage to the SA or the Merchant bank:

As the merchant banks are paid high fees to carry out the stabilization activity and they

carry the limited risk. Thus these high fees do injustice to the issuer company.

3- Interference to the market forces:

Some investors felt that the practice of GSOs was questionable as it artificially propped

up share prices, thereby interfering with the free play of market forces. It was suggested

that starting from the pre-SEBI days, RIIs were led to believe that investing in an IPO

would guarantee them positive initial returns. The GSO would merely reinforce these

attitudes. Further, any aftermarket price stabilization would deprive “value investors”

from purchasing shares from naïve investors when the price falls in the immediate

aftermarket.

.

4- Lack of benefits:

According to GSO regulations, the merchant banks cannot earn profits from the

aftermarket operations of the GSO window period as it is a fee based activity not fund

based activity.

Any profits arising out of the stabilizing activity are to be deposited to the Investor

Protection and education Fund (IPEF). In this scenario the issuer company, the merchant

bank and pre-listed shareholders does not enjoy any benefits.

5- Unwillingness of merchant banks to accept additional responsibility

The issuer companies and merchant banks that we interacted with felt that the legal and

regulatory compliances were cumbersome, and that the consequent risks had increased

manifold. In this scenario, they were not prepared to take any additional responsibility for

a facility that was optional to begin with.

16

Chapter 5

Suggestions & Recommendations

Make Green Shoe Options Mandatory in India:

Green shoe options should be made mandatory in a market like India where SEBI wants

to promote Retail investors to come in and invest their savings to mobilize the flow of

money in the market. so I feel making it mandatory it can develop trust among the small

investors.

Controlling Flippers:

the aftermarket prices or the listing day prices which are changed drastically are due to

flippers involved in it i.e. the people who buy shares to sell them on the day when share

are listed. So SEBI should keep a track of those investors and should try to get Qualified

Institutional Investors (QIB’s).

Valuation of Merchant banks:

The merchant banks should be tracked on about their investment decisions made in the

earlier issues and thus should be marked or ranked upon that. And so on SEBI should

Regulate certain more guidelines, so that the issue can be made or the number and price

of shares can be allocated in the most appropriate manner.

v

REFERENCES

Aggarwal. (2003). Allocation of Initial Public Offerings and Flipping Activity. Journal of financial

economics , 111-135.

Aggarwal, R. (2000). Stabilisation Activities by Underwriters after Initial Public Offerings. Journal of

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