Green Shoe Options in Indian Primary Market

Abstract

The primary market for securities plays an important role in economic development of a country, by enabling companies to mobilize financial resources from the public for undertaking various projects. The primary market also enables members of the public to invest their savings in gainful investment and allows investors to participate directly in the profits of the corporate sector.

Investors buy shares of companies in an Initial Public Offer (IPO) with the hope that the shares would trade in the secondary market at higher price. Investors would certainly be anxious if the price of the shares in the secondary market is highly volatile in the period immediately following the listing date. Such volatility is determined to invest confidence, to the image of the issuer company and the issue managers, and to capital markets at large. This necessitates some sort of price stabilizationmechanism. One such price stabilization mechanism is the Green Shoe Option (GSO).