XYZ Company is planning an IPO of ₹100 crore (10 crore shares @ ₹10 each face value at a book-built price of ₹10 to ₹11). On expectation of huge response from the investors the company has provided for Green Shoe Option.

Role of Stabilising Agent: i) Situation #1 - Where all Green Shoe Shares are bought back: In this situation, funds in the Green Shoe Escrow Account (₹15 Crore in this case) would be deployed by the stabilising agent towards buying up shares from the open market. Given that the prices prevalent in the market would be less than the issue price of ₹10, the stabilising agent would have sufficient funds lying at his disposal to complete this operation. Having bought back all of the 1,50,00,000 shares, these shares would be temporarily held in a special depository account with the depository participant (Green Shoe Demat Account), and would then be returned back to the lender shareholders, within a maximum period of two days after the stabilisation period. ii) Situation #2 - Where none of the Green Shoe Shares are bought back: This situation would arise in the (very unlikely) event that the share prices have fallen below the Issue Price, but the stabilising agent is unable to find any sellers in the open market, or in an event where the share prices continue to trade above the listing price, and therefore there is no need for the stabilising agent to indulge in price stabilisation activities. In either of the above-said situations, the stabilising agent is under a contractual obligation to return the 1,50,00,000 shares that had initially been borrowed from the lending shareholder(s). Towards meeting this obligation, the issuer company would allot 1,50,00,000 shares to the stabilising agent into the Green Shoe Demat Account (the consideration being the funds lying the Green Shoe Escrow Account), and these shares would then be returned by the stabilising agent to the lending shareholder(s), thereby squaring off his responsibilities. iii) Situation #3 - Where some of the Green Shoe Shares are bought back, say 90,00,000 shares: This situation could arise in an event where the share prices witness a drop in the initial stages of the price stabilisation period, but recover towards the latter stages. In this situation, the stabilising agent has a responsibility to return 1,50,00,000 shares to the lending shareholder(s), whereas the stabilising activities have yielded only 90,00,000 shares. Similar to the instance mentioned in Situation #2 above, the issuer company would allot the differential 60,00,000 shares (1,50,00,000 shares - 90,00,000 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 1,50,00,000 shares that had been borrowed from them. Both in Situation #2 and #3, 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 Regulation 45(9) of the ICDR Regulations and the account shall be closed thereafter. Process of Green Shoe Option As per the ICDR Regulations, the over-allotment component under the Green Shoe mechanism could be up to 15% of the IPO, i.e., up to 1,50,00,000 shares, i.e., Green Shoe shares. 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 1,15,00,000 shares. IPO proceeds received from the investors for the IPO shares, i.e., ₹100 Crore (i.e., 10,00,00,000 shares at the rate of ₹10 each) are remitted to the Issuer Company, while the proceeds from the Green Shoe Shares (₹15 Crore, being 1,50,00,000 shares x ₹10/-) are parked in a special escrow bank account, i.e., Green Shoe Escrow Account. During the price stabilisation period, if the share price drops below ₹100, the stabilising agent would utilise the funds lying in the Green Shoe Escrow Account to buy back these shares from the open market. Flowchart of Green Shoe Option Process: Company obtains shareholder approval for exercising Green Shoe Option Appointment of Stabilizing Agent Agreement with Stabilizing Agent Agreement with promoter for borrowing shares Opening Special Account with Bank and Depository Company over allots Commencement of Trading If Drop in Prices (Yes): Stabilizing Agent processes shares from open market Shares borrowed are returned Excess in any transferred to SEBI IEPF fund If Drop in Prices (No): Issuer allots shares to Stabilizing Agent SA return shares Separate listing application for shares issued