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
CS Professional · Strategic Management and Corporate Finance · PYQS · June 2024
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. (c) Where the stabilising agent manages to buy-back some of the Green Shoe Shares, say 20,000 shares.
Answer & Explanation:
Answer 3 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.
Topics: Capital Markets
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