Green Shoe Option Defined

“Green Shoe option”: means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism in accordance with the provisions of the Guidelines (as mentioned in Chapter VIII-A ), which is granted to a company to be exercised through a Stabilising Agent. Green shoe option is applicable for public issues through book building process.

1. In case an issuer company is making an initial public offer of equity shares through the book building mechanism, the company can avail of the Green Shoe option (GSO) for stabilizing the post listing price of its shares, subject tothe provisions in this respect as provided in theGuidelines

2. A company desirous of availing the option granted by this Chapter, shall in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the ‘stabilizing agent’ (SA) at the end of the stabilization period in terms of clause 15. (referred later)

The company shall appoint one of the Lead book runners, amongst the issue management team, as the "stabilizing agent” (SA), who will be responsible for the price stabilization process, if required. The SA shall enter into an agreement with the issuer company, prior to filing of offer document with SEBI, clearly stating all the terms and conditions relating to this option including fees charged / expenses to be incurred by SA for this purpose.(Clause 2) The SA shall also enter into an agreement with the promoter(s) who will lend their shares for the purpose of clause 8A.5, specifying the maximum number of sharesthat may be borrowed from the promoters, which shall not be in excess of 15% of the total issue size.(Clause 3)

The details of the agreements mentioned above shall be disclosed in the draft Red Herring prospectus, and the final prospectus. The agreements shall also be included as material documents for public inspection (Clause 4)

Note: Red Herring prospectus is a preliminary registration statement that must be filed with SEBI. It describes the issue (IPO) and the prospects of the company. There is no price or issue size stated in the Red Herring. It is updated several times before being called the final prospectus. It is called so because it contains a passage in red that states the company is not attempting to sell its shares before the registration is approved by the SEBI.

The Lead Book Runner, in consultation with the SA, shall determine the amount of shares to be overallotted with the public issue, subject to the maximum number specified in clause 3 above. (Clause 5)

The draft Red Herring prospectus, the Red Herring prospectus and the final prospectus shall contain the following additional disclosures:(Clause 6)

1. Name of the SA

2. The maximum number of shares (as also the percentage vis a vis the proposed issue size) proposed to be over-allotted by the company

3. The period, for which the company proposes to avail of the stabilization mechanism,

4. The maximum increase in the capital of the company and the shareholding pattern post issue, in case the company is required to allot further shares to the extent of over-allotment in the issue.

5. The maximum amount of funds to be received by the company in case of further allotment and the use of these additional funds, in final document to be filed with RoC

6. Details of the agreement/ arrangement entered in to by SA with the promoters to borrow shares from the latter which inter-alia shall include name of the promoters, their existing shareholding, number & percentage of shares to be lent by them and other important terms and conditions including the rights and obligations of each party.

7. The final prospectus shall additionally disclose the exact number of shares to be allotted pursuant to the public issue, stating separately therein the number of shares to be borrowed from the promoters and overallotted by the SA, and the percentage of such shares in relation to the total issue

The SA shall borrow shares from the promoters of the company to the extent of the proposed over-allotment. These shares shall be in dematerialized form only. The allocation of these shares shall be pro-rata to all the applicants. The stabilization mechanism shall be available for the period disclosed by the company in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchange(s).(Clause 7). The allocation of these shares shall be pro-rata to all the applicants.(Clause 8) The stabilization mechanism shall be available for the period disclosed by the company in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchange(s). (Clause 9)

The SA shall open a special account with a bank to be called the “Special Account for GSO proceeds of _____ company” (hereinafter referred to as the GSO Bank account) and a special account for securities with a depository participant to be called the “Special Account for GSO shares of company” (hereinafter referred to as the GSO Demat Account). (Clause 10) The money received from the applicants against the overallotment in the green shoe option shall be kept in the GSO Bank Account, distinct from the issue account and shall be used for the purpose of buying shares from the market, during the stabilization period. The shares bought from the market by the SA, if any during the stabilization period, shall be credited to the GSO Demat Account. Clause 11 & 12)

The shares bought from the market and lying in the GSO Demat Account shall be returned to the promoters immediately, in any case not later than 2 working days after the close of the stabilization period. (Clause 13) The prime responsibility of the SA shall be to stabilize post listing price of the shares. To this end, the SA shall determine the timing of buying the shares, thequantity to be bought, the price at which the shares are to be bought etc. (Clause 14)

On expiry of the stabilization period, in case the SA does not buy shares to the extent of shares over-allotted by the company from the market, the issuer company shall allot shares to the extent of the shortfall in dematerialized form to the GSO Demat Account, within five days of the closure of the stabilization period. These shares shall be returned to the promoters by the SA in lieu of the shares borrowed from them and the GSO Demat Account shall be closed thereafter. The company shall make a final listing application in respect of these shares to all the Exchanges where the shares allotted in the public issue are listed. The provisions relating to Guidelines on Preferential Shares (vide Chapter XIII) shall not be applicable to such allotment (Clause 15)

The shares returned to the promoters under clause 13 or 15, as the case may be, shall be subject to the remaining lock in period as provided in the guidelines rdelating to Lock in period (Clause 16)

The SA shall remit an amount equal to (further shares allotted by the issuer company to the GSO Demat Account) * (issue price) to the issuer company from the GSO Bank Account. The amount left in this account, if any, after this remittance and deduction of expenses incurred by the SA for the stabilization mechanism, shall be transferred to the investor protection fund(s) of the stock exchange(s) where the shares of issuer company are listed, in equal parts if the shares are listed in more than one exchanges. The GSO Bank Account shall be closed soon thereafter. (Clause 17)

The SA shall submit a report to the stock exchange(s) on a daily basis during the stabilization period. The SA shall also submit a final report to SEBI in the format specified in Schedule XXIX. (Flag B). This report shall be signed by the SA and the company. This report shall be accompanied with a depository statement for the “GSO Demat Account” for the stabilization period, indicating the flow of the shares into and from the account. The report shall also be accompanied by an undertaking given by the SA and countersigned by the depository(ies) regarding confirmation of lock-in on the shares returned to the promoters in lieu of the shares borrowed from them for the purpose of the stabilization, as per the requirement specified in Clause16. (Clause 18)

The SA shall maintain a register in respect of each issue having the green shoe option in which he acts as a SA. The register shall contain the following details of: (Clause 19)

• in respect of each transaction effected in the course of the stabilizing action, the price, date and time

• the details of the promoters from whom the shares are borrowed and the number of shares borrowed from each; and,

• details of allotments made under clause 8A.15.

The register must be retained for a period of at least three years from the date of the end of the stabilizing period.” (Clause 20)

For the purpose of exercising Green Shoe Option Over allotment shall be defined as an allocation of shares in excess of the size of a public issue, made by the SA out of shares borrowed from the promoters, in pursuance of a green shoe option exercised by the company in accordance with the provisions of the said Chapter. (Clause 21)