--- title: "Green Shoe Option in IPOs: Meaning, Process and SEBI Regulations in India" date: 2026-08-31 author: "Pallash Pamnani" url: https://ksandk.com/corporate/green-shoe-option/ --- # Green Shoe Option in IPOs: Meaning, Process and SEBI Regulations in India Posted On - 31 August, 2026 • By - Pallash Pamnani ![](https://ksandk.com/wp-content/uploads/GSO.webp) ## Introduction An Initial Public Offering (“IPO”) marks the transition of a company from the private market to the public market. While an IPO determines the price and quantity of securities offered to investors, the period immediately following listing can be characterised by significant price volatility as the securities begin trading in the secondary market. To address excessive downward price pressure during this initial trading period, the Securities and Exchange Board of India (“SEBI”) permits issuers to incorporate a Green Shoe Option (“GSO”), also known as an over-allotment option, as a post-listing price stabilisation mechanism. The Green Shoe Option allows specified securities to be over-allotted in a public issue, subject to the conditions prescribed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). A Stabilising Agent, appointed from among the [lead managers](https://ksandk.com/capital-markets/sebi-tightens-merchant-banker-rules/), is responsible for carrying out the price stabilisation process. Importantly, a Green Shoe Option does not guarantee that the market price of an IPO will remain at or above the issue price. Instead, it provides a regulated mechanism through which temporary downward pressure on the newly listed securities may be addressed during the prescribed stabilisation period. This article explains what a Green Shoe Option is, how it works in an Indian IPO, the role of the Stabilising Agent, the 15% over-allotment limit, the applicable SEBI regulations, and the settlement process following the stabilisation period. ## What is a Green Shoe Option in an IPO? The Green Shoe Option is an arrangement under which an issuer may allot or allocate securities in excess of the securities originally offered in a public issue for the purpose of post-listing price stabilisation. The term has its origins in the Green Shoe Manufacturing Company, which is understood to have been the first company to use this type of mechanism in a public offering. Under the ICDR Regulations, a Green Shoe Option refers to an option of allotting equity shares in excess of the equity shares offered in the public issue as a post-listing price stabilising mechanism. In practical terms, the mechanism allows the Stabilising Agent to facilitate an over-allotment of securities at the issue price and subsequently purchase securities from the market, where necessary, during the stabilisation period. The mechanism therefore serves two related purposes: 1. It permits the temporary over-allotment of securities in the public issue; and 2. It provides a mechanism for addressing excessive downward price pressure after listing. The Green Shoe Option is not mandatory. The ICDR Regulations provide that an issuer “may” provide a Green Shoe Option, subject to the prescribed conditions. Accordingly, whether to incorporate a GSO is a matter that may be considered in the structuring of the public issue, rather than a compulsory requirement for every IPO. ## Why is a Green Shoe Option used in an IPO? The principal purpose of a Green Shoe Option is to facilitate post-listing price stabilisation. Immediately after an IPO is listed, the market price may move significantly because of factors such as investor sentiment, demand and supply, market conditions and selling pressure from investors. A sharp decline in the price shortly after listing may affect investor confidence and result in disorderly trading conditions. The Green Shoe Option allows the Stabilising Agent to intervene within the regulatory framework during the stabilisation period by purchasing shares from the market, where appropriate. The objective is therefore not to artificially maintain a particular price. Rather, it is to provide a limited and regulated mechanism to absorb temporary selling pressure and facilitate orderly price discovery in the early period of secondary market trading. The GSO should consequently be understood as a price stabilisation mechanism and not a price guarantee. ## Green Shoe Option under the SEBI ICDR Regulations The Green Shoe Option is governed by the ICDR Regulations. The relevant provisions include: - **Regulation 57**: price stabilisation through Green Shoe Option in the relevant public issue framework; - **Regulation 153**: price stabilisation through Green Shoe Option for further public offers; and - **Regulation 279**: price stabilisation through Green Shoe Option for SME issues. The provisions prescribe requirements relating to shareholder authorisation, appointment of the Stabilising Agent, borrowing of securities, over-allotment, disclosures, stabilisation activities, settlement and reporting. A key feature of the framework is that the maximum securities that may be borrowed for the purpose of the over-allotment cannot exceed 15% of the issue size, subject to the applicable regulatory requirements. The ICDR framework is designed to permit limited market intervention while imposing safeguards intended to prevent the mechanism from being used as a means of artificial [price manipulation](https://ksandk.com/capital-markets/supreme-court-sebi-pfutp-fraud-disgorgement-reliance-industries/). ## Is the Green Shoe Option mandatory in an IPO? No. A Green Shoe Option is not mandatory for every IPO. The relevant provisions of the ICDR Regulations use the expression that an issuer “may” provide a Green Shoe Option, subject to specified conditions. The use of “may” indicates that the mechanism is discretionary. An issuer may therefore consider incorporating a GSO depending on factors such as the structure and size of the issue, expected market conditions, investor demand and the commercial considerations surrounding the public offering. Where a Green Shoe Option is incorporated, however, the issuer and relevant intermediaries must comply with the applicable requirements under the ICDR Regulations. ## Key procedural requirements for a Green Shoe Option The operation of a Green Shoe Option involves several regulatory and contractual requirements. **1. Shareholder authorisation:** The shareholders of the issuer must authorise, through the resolution approving the public issue, the allotment of specified securities to the Stabilising Agent, if required, upon expiry of the stabilisation period. **2. Appointment of the Stabilising Agent**: The issuer is required to appoint a lead manager as the Stabilising Agent. The Stabilising Agent is responsible for carrying out the price stabilisation process in accordance with the ICDR Regulations and the terms of the relevant agreements. **3. Agreement between the issuer and Stabilising Agent**: Before filing the draft [offer document](https://ksandk.com/capital-markets/what-are-indias-key-capital-markets-regulations-2026/), the issuer and the Stabilising Agent are required to enter into an agreement setting out the terms and conditions relating to the Green Shoe Option. This includes matters such as the fees payable to the Stabilising Agent and expenses associated with the stabilisation process. **4. Borrowing of securities**: The Stabilising Agent is required to enter into an agreement with the [promoters](https://ksandk.com/capital-markets/sebi-provides-relief-to-listed-firms/) and/or eligible pre-issue shareholders for borrowing specified securities. The maximum number of securities that may be borrowed for the purpose of the over-allotment is subject to the 15% limit of the issue size prescribed under the applicable regulations. The securities borrowed for the GSO mechanism are used to facilitate the over-allotment made in the public issue. **5. Disclosure in the offer document**: The offer document is required to contain the material disclosures relating to the Green Shoe Option prescribed under the ICDR Regulations. This allows investors to understand the existence and broad terms of the price stabilisation mechanism associated with the issue. **6. Stabilisation period and reporting**: The Stabilising Agent undertakes the relevant market purchases during the prescribed stabilisation period, which may extend up to 30 days from the commencement of trading, subject to the applicable regulatory framework. Following completion of the stabilisation process, the Stabilising Agent is required to undertake the prescribed reporting and settlement procedures. The Stabilising Agent is also required to maintain the relevant records and register relating to the borrowing, stabilisation transactions and subsequent allotments for the period prescribed under the regulations. ## How does a Green Shoe Option work? A simple IPO example The mechanics of a Green Shoe Option can be better understood through a hypothetical example. Assume that: - An IPO offers 100 equity shares; - The issue price is ₹100 per share; and - The issuer has incorporated a Green Shoe Option allowing an over-allotment of 15 additional shares. The process can broadly be understood in four stages. #### Stage I: Borrowing of shares Before the IPO, the Stabilising Agent enters into an arrangement with eligible promoters and/or pre-issue shareholders to borrow up to the permitted number of shares. In our example, the Stabilising Agent borrows 15 shares. The borrowing arrangement enables the Stabilising Agent to facilitate the over-allotment without requiring the issuer to immediately issue the additional shares. #### Stage II: Over-allotment in the IPO The additional 15 borrowed shares may be over-allotted to successful applicants along with the original 100 shares, subject to the applicable regulatory requirements. Accordingly, investors may receive an aggregate of 115 shares, even though the original issue comprised 100 shares. The Stabilising Agent, however, now has an obligation to return the 15 borrowed shares to the lenders. #### Stage III: Post-listing price stabilisation Following listing, the Stabilising Agent monitors the market and may purchase shares from the market where required for the purposes of stabilisation. Two broad scenarios may arise. ***Scenario A: Market price remains above the issue price***: Assume that the shares are listed at ₹120 and continue to trade above the ₹100 issue price. In such circumstances, there may be no need for the Stabilising Agent to purchase shares from the market for stabilisation. At the end of the stabilisation period, the remaining borrowed shares are dealt with in accordance with the applicable settlement mechanism. ***Scenario B: Market price falls below the issue price***: Assume that the shares are listed at ₹100 but subsequently face significant downward pressure and trade at ₹90. Subject to the applicable regulatory requirements and its commercial judgment, the Stabilising Agent may purchase shares from the market during the stabilisation period. These purchases can absorb some of the temporary selling pressure in the market. At the same time, the shares purchased from the market can be used to meet the Stabilising Agent’s obligation to return the borrowed securities. #### Stage IV: Settlement of the borrowed shares The manner in which the borrowed shares are settled depends on whether the Stabilising Agent was able to purchase the required shares from the market during the stabilisation period. ![](https://ksandk.com/wp-content/uploads/image-69.png) ### Where shares are purchased from the market If the Stabilising Agent purchases shares from the market, those shares are required to be returned to the lenders within the period prescribed under the ICDR Regulations following closure of the stabilisation period. ### Where the Stabilising Agent cannot purchase all the required shares If the Stabilising Agent is unable to purchase all of the borrowed shares from the market during the stabilisation period, the issuer may issue the remaining number of shares to the Stabilising Agent, to the extent of the shortfall, in accordance with the applicable regulatory framework. The Stabilising Agent then returns those shares to the lenders. Thus, in our hypothetical example, the market ultimately has 115 shares, comprising the original 100 shares plus the 15 shares forming part of the over-allotment mechanism. ## Green Shoe Option vs Oversubscription Offer in an OFS The Green Shoe Option should not be confused with an Oversubscription Offer in an Offer for Sale (“OFS”) through the stock exchange mechanism. Although both mechanisms can involve securities being allotted or transferred beyond the initially offered quantity, their purposes are different. | Green Shoe Option | Oversubscription Offer in OFS | | --- | --- | | Primarily a post-listing price stabilisation mechanism | Primarily addresses excess investor demand | | Operates through a regulated over-allotment mechanism | Operates under the applicable OFS framework | | Involves a Stabilising Agent | Does not serve the same Stabilising Agent function | | Intended to address short-term downward price pressure | Intended to accommodate additional demand | | Governed by the relevant GSO provisions of the ICDR Regulations | Governed by the applicable OFS framework | The distinction is important because an over-allotment of securities does not, by itself, mean that a Green Shoe Option is being used. The defining feature of a GSO is its connection with the regulated **post-listing price stabilisation process**. ## What is the role of the Stabilising Agent in an IPO? The Stabilising Agent plays a central role in the operation of a Green Shoe Option. Typically appointed from among the lead managers to the issue, the Stabilising Agent is responsible for implementing the stabilisation mechanism in accordance with the ICDR Regulations and the relevant contractual arrangements. Its functions broadly include: - entering into the necessary borrowing arrangements; - facilitating the over-allotment of securities; - monitoring the post-listing market; - purchasing securities from the market where required for stabilisation; - maintaining records of the stabilisation transactions; - returning borrowed securities to the lenders; and - undertaking the prescribed reporting and settlement procedures. The Stabilising Agent therefore acts as the operational intermediary through which the Green Shoe Option is implemented. ## Does a Green Shoe Option guarantee the IPO price? No. A Green Shoe Option does not guarantee that an IPO will trade at or above its issue price after listing. Its purpose is to provide a limited mechanism for addressing excessive downward price pressure during the prescribed stabilisation period. Market prices continue to be determined by demand, supply and other market factors. The GSO should therefore not be interpreted as a mechanism that protects investors from losses or guarantees a particular post-listing price. ## What is the maximum Green Shoe Option in an IPO? Under the applicable provisions of the ICDR Regulations, the securities borrowed for the purpose of over-allotment under the Green Shoe Option cannot exceed 15% of the issue size. Accordingly, if the issue size is 100 shares, the maximum over-allotment under the hypothetical example would be 15 shares, subject to compliance with all applicable regulatory requirements. The 15% figure should not, however, be understood in isolation. The issuer, Stabilising Agent and other intermediaries must comply with the complete framework governing the GSO, including eligibility, disclosure, borrowing, stabilisation, settlement and reporting requirements. ## Why is the Green Shoe Option important for India’s capital markets? The transition from the primary market to secondary market trading is an important stage in the life of a public issue. Newly listed securities can experience heightened volatility as investors establish a market price. The Green Shoe Option provides a regulated framework for limited intervention during this period. Its importance lies not in preventing market movements, but in facilitating an orderly trading environment while preserving the underlying process of price discovery. For issuers and intermediaries, the GSO can therefore serve as an additional tool when structuring a public issue. For investors, understanding the mechanism can provide greater clarity regarding the factors that may influence trading immediately after an IPO is listed. ## Conclusion The Green Shoe Option in an IPO is an important price stabilisation mechanism under India’s [capital markets](https://ksandk.com/practice-areas/capital-markets-law-firm/) framework. It permits the controlled over-allotment of securities and enables a Stabilising Agent to undertake market purchases, where necessary, to address temporary downward pressure following listing. The mechanism is discretionary rather than mandatory, and its operation is subject to detailed requirements under the SEBI ICDR Regulations relating to shareholder authorisation, appointment of the Stabilising Agent, borrowing of securities, disclosures, stabilisation, settlement and reporting. Importantly, a Green Shoe Option does not guarantee an IPO’s issue price or prevent market volatility. Instead, it provides a limited and regulated mechanism intended to support orderly trading and price discovery during the initial post-listing period. As India’s capital markets continue to develop and public offerings become increasingly sophisticated, the Green Shoe Option remains a relevant tool for issuers and market intermediaries seeking to manage the transition from the primary market to secondary market trading within the regulatory framework prescribed by SEBI. *Last Updated on 31 August, 2026* Get King Stubb & Kasiva’s legal updates in your Google feed[![Add King Stubb & Kasiva as a preferred source on Google](https://ksandk.com/wp-content/uploads/google_preferred_source_badge_light_en@2x.png)](https://www.google.com/preferences/source?q=https://ksandk.com/) --- ## Office Locations - [New Delhi](https://ksandk.com/locations/top-corporate-law-firm-in-delhi/) (HQ): +91-11-41318190 | info@ksandk.com - [Mumbai](https://ksandk.com/locations/top-corporate-law-firm-in-mumbai/): 3 offices (Nariman Point, Lower Parel, Andheri) | mumbai@ksandk.com - [Bangalore](https://ksandk.com/locations/top-corporate-law-firm-in-bangalore/): bangalore@ksandk.com - [Chennai](https://ksandk.com/locations/chennai/): chennai@ksandk.com - [Hyderabad](https://ksandk.com/locations/hyderabad/): hyderabad@ksandk.com - [Pune](https://ksandk.com/locations/pune/): pune@ksandk.com - [Kochi](https://ksandk.com/locations/kochi/): kochi@ksandk.com ## Contact - [Contact Page](https://ksandk.com/contact-us/) - General: info@ksandk.com | +91-11-41318190 - WhatsApp: +91-7428567444 - [Privacy Statement](https://ksandk.com/privacy-statement/) - [Terms of Use](https://ksandk.com/terms-of-use/)