Está en la página 1de 8

Green Shoe Option is a mechanism used by companies to provide price support to investors for shares procured by them in the

public offering, in the event that the prices of equity shares witness a drop immediately after listing. This article explores the regulatory provisions in relation to the implementation of Green Shoe Option in capital market offerings in India, and the processes involved in implementation thereof. 1.Overview Introduced in 2003, Green Shoe Option is an overallotment
mechanism permitted by the Securities and Exchange Board of India (SEBI) for stabilising the prices of newly-listed shares of companies immediately after listing. A commonly used tool in international capital market transactions, Green Shoe Option is used by investment bankers, acting as stabilising agents, to provide share price support to companies for a certain small period after their public offering. Simply put, it is a price stabilisation mechanism whereby a company over-allots shares to investors participating in the issue, with a view to have the merchant banker buy them back from the open market after listing, in order to arrest any fall in the share prices below the issue price. This term has been derived from the name of a company that first implemented this mechanism in its public offering in 1960 the Green Shoe Manufacturing Company (now Collective Brands Performance + Lifestyle Group, a subsidiary of Collective Brands Inc., USA). SEBI introduced the Green Shoe mechanism in Indian capital markets in 2003 vide a circular SEBI/ CFD/DIL/ DIP/Circular No. 11 dated 14th August, 2003. Since then, a number of companies have implemented the Green Shoe Option in their initial public offerings e.g. Electrosteel Integrated Ltd., Indiabulls Power Ltd., Housing Development & Infrastructure Ltd., etc. 2. How Does It Work? Regulation 45 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR Regulations) lays down the provisions regarding implementation of Green Shoe Option in public offerings. There are three key parties involved in implementing this mechanism:

issuer company, being the company proposing to undertake the public offering; stabilising agent, being one of the merchant bankers, who would be in charge of the stabilisation process; and lender-shareholder, being one of the pre-issue share-holders holding a significant portion of shares of the issuer company. A pictorial depiction of its operation is: During Pre-Issue Period: After obtaining shareholder approval for use of the Green Shoe mechanism in its proposed public offering, an issuer company needs to appoint one of its investment bankers as the stabilising agent. It shall be the key responsibility of the stabilising agent to conduct price stabilisation activities and provide share price support during the stabilisation period being a period of up to 30 days after the issuer company receives trading permission from the stock exchanges for its shares. The issuer company enters into a contract with the stabilising agent detailing the terms and conditions relating to the Green Shoe Option, including fees to be charged by the stabilising agent, expenses to be incurred towards discharging responsibilities, etc. The stabilising agent also enters into a contract with the lender-shareholder - being any of the pre-issue shareholders in case of an initial public offering (IPO), and in case of a follow-on public offering (FPO), being any of the pre-issue shareholders holding more than five per cent of the share capital detailing key terms, inter alia, the maximum number of shares that may be borrowed for over-allotment. The stabilising agent would borrow from the lender-shareholders such quantity of the equity shares proposed to be over allotted in the issue, subject to a maximum of 15% of issue size.

Fungibility

Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, shares in a company, bonds, precious metals, or currencies. It refers only to the equivalence of each unit of a commodity with other units of the same commodity. Fungibility does not describe or relate to any exchange of one commodity for some other, different commodity. As an example: if X lends Y a $10 bill, he does not care if she is repaid with the same $10 bill, two $5 bills, a $5 bill and five $1 bills or bunch of coins that total $10 as currency is fungible. However, if Y borrows X car she will most likely be upset if Y returns a different vehicle--even a vehicle that is the same make and model--as automobiles are not fungible. However, gasoline is fungible and though X may have a preference for a particular brand and grade of gasoline, her primary concern is that the level of fuel be the same (or more) as it was when she lent the vehicle to Y. Fungibility is different from liquidity. A good is liquid if it can be easily exchanged for money or another different good. A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place. Examples:

Cash is fungible: one US$10 bank note is interchangeable with another. It is also interchangeable with two $5s, ten $1s, and other combinations. Different issues of a government bond (maybe issued at different times) are fungible with one another if they carry precisely the same rights and any of them is equally acceptable in settlement of a trade. Diamonds are not fungible because diamonds' varying cuts, colors, grades, and sizes make it difficult to find many diamonds with the same cut, color, grade, and size. Packaged products on a retail shelf are fungible if they are of the same type. Customers and clerks can interchange packages freely until purchase, and sometimes afterward. When the customer opens the package and uses the product, however, it is usually considered unique and no longer interchangeable with unopened packages unless there is some customer service issue, such as a return or exchange. Even then, the customer might consider a swap with a trusted friend who also buys the same product.

Fungibility does not imply liquidity, and liquidity does not imply fungibility. Diamonds can be readily bought and sold (the trade is liquid) but individual diamonds, being unique, are not interchangeable (diamonds are not fungible). Indian rupee bank notes are mutually interchangeable in London (they are fungible there) but they are not easily traded there (they cannot be spent in London). In contrast to diamonds, gold coins of the same grade and weight are fungible, as well as liquid

Demutualization Demutualization is the process by which a customer-owned mutual organization (mutual) or cooperative changes legal form to a joint stock company.[1] It is sometimes called stocking or privatization. As part of the demutualization process, members of a mutual usually receive a "windfall" payout, in the form of shares in the successor company, a cash payment, or a mixture of both. Mutualization or mutualisation is the opposite process, wherein a shareholder-owned company is converted into a mutual organization, typically through takeover by an existing mutual organization. Furthermore, re-mutualization depicts the process of aligning or refreshing the interest and objectives of the members of the mutual society. The mutual traditionally raises capital from its customer members in order to provide services to them (for example building societies, where members' savings enable the provision of mortgages to members). It redistributes some profits to its members. By contrast a joint stock company raises capital from its shareholders and other financial sources in order to provide services to its customers, with profits or assets distributed to equity or debt investors. In a mutual organization, therefore, the legal roles of customer and owner are united in one form ("members"), whereas in the joint stock company the roles are distinct. This allows a broader capital base if the customers cannot or will not provide sufficient financing to the organization. However, a joint stock company must also try to maximize the return for its owners instead of only maximizing the return and customer services to its customers. This can lead to a decline in customer service to the extent that customers', management's and shareholders' interests diverge. There are three general methods in which an organization might demutualize, full demutualization, sponsored demutualization, and into a mutual holding company (MHC). In any type of demutualization, insurance policies, outstanding loans, etc., are not directly affected by the organization's change of legal form.

In a full demutualization, the mutual completely converts to a stock company, and passes on its own (newly issued) stock, cash, and/or policy credits to the members or policyholders. No attempt is made to preserve mutuality in any form. A sponsored demutualization is similar; the mutual is fully demutualized and its policyholders or members are compensated. The difference is that the mutuality is essentially bought by a stock corporation. Instead of receiving stock in the formerly mutual company, stock in the new parent company is granted instead. A mutual holding company is a hybrid concept, part stock company and part mutual company. Technically, the members still own over 50% of the company as a whole. Because of this, they are generally not significantly compensated for what would otherwise be viewed as loss of property. (This is also why many jurisdictions, including Canada,[3] disallow the formation of MHCs.) The core participants are isolated into a special segment of the company, still viewed as "mutual". The rest is a stock company. This part of the business might be publicly traded, or held as a wholly owned subsidiary until such time that the organization should choose to go public.

Mutual holding companies are not allowed in New York where attempts by mutual insurance to pass permissible legislation failed. Opponents of mutual insurance holding companies referred to the establishment of mutual holding companies in New York as Legalized Theft.

ESOP An employee stock ownership plan (ESOP) is a defined contribution plan that provides a company's workers with an ownership interest in the company. In an ESOP, companies provide their employees with stock ownership, typically at no cost to the employees. Shares are given to employees and are held in the ESOP trust until the employee retires or leaves the company, or earlier diversification opportunities arise. There are annual limits on the amount of deductible contributions an employer can make to an ESOP. ESOPs are governed by federal pension laws, called the Employee Retirement Income Security Act, or ERISA. ERISA sets forth clear requirements to ensure that there can be no preferred classes of participants in an ESOP; all employees must be treated proportionally the same. Internal Revenue Code section 404(a)(3) provides for an annual limit on the amount of deductible contributions an employer can make to a tax-qualified stock bonus or profit-sharing plan of 25 percent of the compensation otherwise paid or accrued during the year to the employees who benefit under the plan. The National Center for Employee Ownership estimates that there are approximately 11,300 employee stock ownership plans for over 13 million employees in the United States.[1] Notable U.S. employee-owned corporations include the 150,000 employee supermarket chain Publix Supermarkets, McCarthy Building Company and photography studio company Lifetouch. Today, most private U.S. companies that are operating as ESOPs are structured as S corporation ESOPs (S ESOPs). Employee ownership can be accomplished in a variety of ways. Employees can buy stock directly, be given it as a bonus, can receive stock options, or obtain stock through a profit sharing plan. Some employees become owners through worker cooperatives where everyone has an equal vote. But by far the most common form of employee ownership in the U.S. is the ESOP, or employee stock ownership plan. Almost unknown until 1974, about 11,000 companies now have these plans, covering over 13 million employees. Companies can use ESOPs for a variety of purposes. Contrary to the impression one can get from media accounts, ESOPs are almost never used to save troubled companiesonly at most a handful of such plans are set up each year. Instead, ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars. In almost every case, ESOPs are a contribution to the employee, not an employee purchase.

ESOP Rules
An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible,

within certain limits. Shares in the trust are allocated to individual employee accounts. Although there are some exceptions, generally all full-time employees over 21 participate in the plan. Allocations are made either on the basis of relative pay or some more equal formula. As employees accumulate seniority with the company, they acquire an increasing right to the shares in their account, a process known as vesting. Employees must be 100% vested within three to six years, depending on whether vesting is all at once (cliff vesting) or gradual. When employees leave the company, they receive their stock, which the company must buy back from them at its fair market value (unless there is a public market for the shares). Private companies must have an annual outside valuation to determine the price of their shares. In private companies, employees must be able to vote their allocated shares on major issues, such as closing or relocating, but the company can choose whether to pass through voting rights (such as for the board of directors) on other issues. In public companies, employees must be able to vote all issues.

Uses for ESOPs


1. To buy the shares of a departing owner: Owners of privately held companies can use an ESOP to create a ready market for their shares. Under this approach, the company can make tax-deductible cash contributions to the ESOP to buy out an owner's shares, or it can have the ESOP borrow money to buy the shares (see below). 2. To borrow money at a lower after-tax cost: ESOPs are unique among benefit plans in their ability to borrow money. The ESOP borrows cash, which it uses to buy company shares or shares of existing owners. The company then makes tax-deductible contributions to the ESOP to repay the loan, meaning both principal and interest are deductible. 3. To create an additional employee benefit: A company can simply issue new or treasury shares to an ESOP, deducting their value (for up to 25% of covered pay) from taxable income. Or a company can contribute cash, buying shares from existing public or private owners. In public companies, which account for about 5% of the plans and about 40% of the plan participants, ESOPs are often used in conjunction with employee savings plans. Rather than matching employee savings with cash, the company will match them with stock from an ESOP, often at a higher matching level.

ESPP

In the United States, an employee stock purchase plan (ESPP) is a tax-efficient means by which employees of a corporation can purchase the corporation's stock, often at a discount. For example, the discount might be 10% off on the stock's fair value market price at a certain date as determined by the plan. Employees contribute to the plan through payroll deductions, which build up between the offering date and the purchase date. At the purchase date, the company uses the accumulated funds to purchase shares in the company on behalf of the participating employees. The amount of the discount depends on the specific plan but can be as much as 15% lower than the market price. Depending when the employee sells the shares, the disposition will be classified as either qualified or not qualified. If the position is sold two years after the offering date and at least one year after the purchase date, the shares will fall under a qualified disposition. If the shares are sold within two years of the offering date or within one year after the purchase date the disposition will not be qualified. These positions will have different tax implications

Definition of 'Employee Stock Purchase Plan - ESPP'


A company-run program in which participating employees can purchase company shares at a discounted price. Employees contribute to the plan through payroll deductions, which build up between the offering date and the purchase date. At the purchase date, the company uses the accumulated funds to purchase shares in the company on behalf of the participating employees. The amount of the discount depends on the specific plan but can be as much as 15% lower than the market price.

Investopedia explains 'Employee Stock Purchase Plan ESPP'


Depending when you sell the shares, the disposition will be classified as either qualified or not qualified. If the position is sold two years after the offering date and at least one year after the purchase date, the shares will fall under a qualified disposition. If the shares are sold within two years of the offering date or one year after the purchase date the disposition will not be qualified. These positions will have different tax implications.