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Greenshoe Option (Definition, Process) | How does Greenshoe Option Work? - YouTube
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today we have a topic with us is the
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greenshoe option this option has been
adopted by the investment banks during
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the course of what we call as you know
when they are underwriting
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IPOs or or any of the company's details
so they take into account underwriting
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into consideration now what exactly
underwriting is all about is we are
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going to understand here see when when a
company goes for an IPO remember one
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thing when a company goes for an IPO day
they give the responsibility to
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subscribe the shares to the investment
bankers that you know you have to make
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sure that this is the security gets
subscribed now if things go here in the
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opposite direction then you will need to
buy out that is if the investors don't
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subscribe and you will have to buy so
this sum details year let's read that the
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12 year old company pushed its expected
price interval from 1921
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21 to 23 according to
new SEC filings so the company still
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intends to sell up to 11.5
million shares in its debut in a figure
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that is inclusive of 1.5 million share
greenshoe option that is made available
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to its underwriters no issues let's begin
with first what is the green shoe option
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see the greenshoe option is a clause
what is it a clause that is used during
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the IPO wherein the underwriters they
get to buy an additional 15% how
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much 15% of the company's shares
at the offering price right okay second
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how does this greenshoe option work
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well the green show option is coined
after the dome the green shoe
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manufacturing that was first to
incorporate green shoe clause in its
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underwriting agreement see this is how
greenshoe option works and I'll show you
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a step by step process the first is that
when a company you know wants to raise
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capital for its future development plan
one of the ways it can raise money
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through an IPO second now during an IPO
company declares an issue price for its
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security and announces a particular
quantity of the stock it will use let's
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see 1 million securities at file each
okay 1 million security at 5
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each knowing he is a blue chip companies
or a company with a very good background
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in statistics it it may also happen that
the demand for such security goes
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uncontrollably up and you to which the
prices will rise okay third secondly
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know that the demand goes up actual
subscriptions are very more than then
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the expected let's say 5,00,000 versus 1,00,000 expected so in this case the number
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of these shares are located to each
subscriber comes down proportionately to
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two numbers should versus then expected
got it okay fourth now there is a gap
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created between the required price and
the actual price which is due to the
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unexpected nature of demand okay for the
security so in order to control this
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demand supply gap companies come up with
the what we call as greenshoe option
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right they come up with the Greenshaw
option fifth you know in this type of
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option the company at the time of the
its proposal for for the IPO declares
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the strategy critical ends its strategy
to exercise the green show option no
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hence it approaches a what we call as
merchant banker in the market who will
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act as a stabilizing agent now at the
time of the issue of this occurred to
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this stabilizing agent they borrow
certain shares from the promoters to
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company and in order to allow them to
additional subscribers in the market in
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the way that when the trading starts the
price of the security is not
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dramatically raised due to the demand in
the supply but that was a 6. I'll
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go with the 7 so the money raised from
the additional offering in the market
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are not deposited in any party's account
the money is devoted to deposit it in
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the escrow created by the
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no one's the trading starts in the
market destabilizing agent can what we
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call as withdraw money that is deposited
in the escrow account
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as for the requirement and he purchases
backs exist shares from the shareholders
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and repaid to the promoters of the
company finally the entire process of
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lending shares by promoters and repay of
the same after the particular time
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period by stabilizing agent is called
the stabilizing mechanism perfect so
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this is all the whole process works now
let me take you to the next part that is
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what are the features of the greenshoe
option see the entire option the entire
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stabilizing mechanism needs to be
completed within how manage it is it has
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to be completed in 30 days or let me
start with the first one it is to be
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completed in the 30 days time span from
the date of the listing of the company
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within which he needs to borrow and
return the required quantity of the
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shares before the present so if he is
unable to complete the process within
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the timeline and is able to return only
the power of the total shares of the
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promoter during the time fishing company
will allow the remaining shares of the
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to the promoters second the promoters
can lend up to maximum of 15% of the
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total issue to the stabilizing agent so
for example if the total issue is
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supposed to be 1 million shares then the
promoter can lend stabilizing agent only
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up to maximum to 1,50,000
shares for a lot men to access
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subscribers now the first exercise of
the option was made in closely in 1980
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by a firm that named as green shoe
manufacturing so note that it is not
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known as the stride right corporations
and you know the option is also known as
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the over allotment option so that's it
is forth the greenshoe option is a way
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to stabilize the price the price
stabilization is regulated and permitted
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by the SEC that C Securities Exchange
Commission so the carbon emissions
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to exercise the greenshoe option in the
future it needs to clearly mention the
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intricate details in the red herring
prospectus and it shall publish during
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the issue of these securities
now the stabilizing agents need to
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execute separate agreements with the
company and with the promoters with
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mention all details and about the prize
and the quantities and the shares to be
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listed also mentioned in the deadlines
of the stabilizing agent now I'll talk
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about significance of the exercising the
green show option see the green show
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option helps for price stabilization of
the company market and the economy as a
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whole it also controls a shooting up you
know of the principle of the prices the
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company shares due to uncontrollable
demand and tries to align the demand and
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supply equation now the arrangement is
beneficial to underwrite you know to the
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underwriters who sometimes the act is a
stabilizing agents for the company so in
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a way that borrow the shares from the
promoters at a particular price and sell
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them at a higher price to investors once
the price goes up so then when the
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prices tend to go up down the purchase
shares from the market and return them
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to the promoters this is how they earn
profit so this mechanism of beneficial
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investor you know as well it works in
the way to stabilize the price and thus
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making it cleaner and transfer them to
investors and helps them to make deep
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better analysis so the green show option
is beneficial for the markets because
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they intend to correct the you know
prices due to the increase in the
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demand and is an incorrect measure for
share price so hence the company tries
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to direct the investors rightly by
analyzing the other things rather than
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just only demand for the correct share
price
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so let me get to the conclusion to this
see the greenshoe option is based on the
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companies of farsighted vision which
foresees the increased demand for the
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stock or in the market and it also
refers to the popularity within the
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general public and the investors faith
in them to perform the future and it
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give them it gives them a very good
returns so this type of greenshoe option
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is beneficial okay and to the company
the right is the markets and investors
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and economy as a whole so it is the duty
of the investor to read the offered
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document before any kind of the
investment door for the optimal returns
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so that's it for this particular topic
so that's it for this particular topic
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