The greenshoe option is a method by which a public company can buy back its own share. This option has been introduced by the Security Exchange Board India (SEBI). The greenshoe option is an overallotment mechanism permitted by SEBI for stabilizing the prices of the newly listed public company immediately after listing.
When a company goes for Initial Public Offering or IPO it becomes very difficult to stabilize its price. To discover the price, the companies generally use the book building process, which requires the help of a merchant banker.

In the book-building process, all the bids are collected and the cut off price is discovered and after that the IPO is complete.
After this process, the shares are listed in the secondary market where the control over the price of the shares is not in the hands of the issuer company or the merchant banker. The price in the secondary market is influenced by the demand and supply of particular security among the investors. This demand can be made artificially in the market which can create unusually movement in the stock price immediately after the IPO.

In such situations to stabilize the price in the market, the stabilizing agent, i.e. the merchant banker uses the greenshoe option as mentioned in the prospectus to keep the share price under control and prevent the drop in the prices of shares. The merchant banker can buy back up to 15% of the shares from the secondary market and this option can be utilized only within a period of 30 days from the day of listing of the shares in the secondary market. 

The stabilizing agent is required to enter into an agreement with the issuer company before the filing of the Initial Public Offering, which clearly includes all the terms and conditions regarding the arrangement between the agent and the company and also states the fees of the agent. The stabilizing agent is then eligible to borrow shares from the promoters of the company to the extent of 15% of the shares as allowed by the SEBI. The regulation that comes into play while using the greenshoe option is Regulation 45 of the Security Exchange Board of India ICDR Regulations.

It is important to know that this option is allowed by SEBI only for the new companies who have been listed and submitted the IPO to the SEBI while complying with all the required guidelines for making an IPO.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.