meaning of Green Shoe option & Book Building process?

Question

Particularly regarding Guidelines issued by SEBI, India

Answer 1

Taking Do Securities Exchange Board of India’s (Sebi) new norms related to IPO book building process sound encouraging to retail investors. At the outset at least it seems so. But the question that needs to be answered first is whether the package delivers a better deal for retail investors or not? The apparent feeling is, yes it does. This change is due to the fact that Sebi, the reforms-savvy capital market regulator under the stewardship of GN Bajpai, seems to have learnt a lesson from the steady decline in retail investors’ participation in the primary market in the recent past. Two factors have ostensibly attributed to this visible lack of interest on the part of retail investors. First the aggressive pricing by issuers and secondly less chances of getting a pie of new equities have together dampened the sentiment of retail investors, hence this mass disenchantment. But now the new norms are set to ensure at least two things: first, the response to the issue would be genuinely market driven as new measures would safeguard the price discovery from artificial demand under the book building process and second, lowering QIB (Qualified Institutional Buyer) allocation will leave a relatively higher portion of the issue available to retail investors. Needless to say the new measures are clearly in favour of the retail investors. But then are the retail investors all set to become the real first among the equals in Indian primary market?
Unfair story

>>>>>>>>>>>>>>>>>>>>Book building is a kind of initial public offering method in stock market, widely practiced in advanced countries like US and UK. However, for decades it has generated controversy because it allows shares to be allocated on a preferential basis.

It A retail investor will now be defined as someone who applies for shares worth Rs.50,000/- or less.

The primary difference between book building and other IPO methods is that in the former the underwriters hold total control over the allocation. In contrast, book building requires the allocation of shares to be based on current bids, without regard to any past relationship between certain bidders and the auctioneer, and they are usually open to more or less everyone. Sebi introduced the book-building process in 1995 with an objective to arrive at the optimum price discovery but instead the process has ended up making the markets more volatile to the further disadvantage of the retail investors. Many market experts allege that institutional intermediaries involved in the book-building process act in collusion with the lead managers to manipulate the whole process. How? Before the issue opens, hype is created about the company’s fundamentals to justify the price arrived through book-building and the small investors get tempted. This lure of book-building sometimes proves fatal. In certain cases the investors end up paying more for the overvalued stock on the listing day. Further, when stock prices move up on the day of listing, co-lead managers take advantage of the situation by off-loading their equities and book profits. This leads to a sharp decline in the prices and many investors don’t know what to do with their holdings. Some experts even allege that there has been a nexus between promoters and institutional players in pricing these issues in many cases. While, on one hand promoters raise huge quantum of money by choosing the book-building route, on the other hand, institutional investors get restless in subscribing because they assume the opportunity to earn ‘quick cash’ on the day of listing would be lost. Overall, the entire mechanism works out to be a price fixing strategy rather than a superior price discovery exercise.
Fair turn

In a span of over a year, Sebi chairman Bajpai has taken a few corrective measures to plug the loopholes in the regulatory mechanism and streamlining the entire system as per the new global standards. For instance, introduction of T+2 mechanism or shifting the focus from profitability to net tangible assets for assessing new companies might have attracted differing views on implications but no one has dared to disagree since these changes are necessary for enhancing the quality of the system. He unveiled one more set of primary market reforms on June 24, 2003, to address the anomalies that have so far set into the IPO book building process. The idea is plain: empowering the retail investors and placing them on a more level playing field with the institutional investors. Some of these changes have been aimed at boosting the investors’ confidence too. Let’s look at few key initiatives in this holistic package here to understand what exactly it can deliver once it comes to effect.

Retail investors redefined

According to Sebi, the retail investors for a book built issue will be defined as "those who make an investment of upto Rs.50,000/-". Until now, retail investors used to be defined on the basis of the number of shares they bought. It will now depend on value rather than the number of shares applied for. Thus a retail investor will now be defined as someone who applies for shares worth Rs.50,000/- or less, instead of the current definition of one who applies for up to 1,000 shares or less. These changes owe their origin to the analysis of few market experts who analyzed the aftermath of Maruti Udyog IPO. The experts felt that the concept of having 1,000-share limit for defining a retail investor may be flawed, and that it could be modified to the amount of money invested. So Sebi stepped in to modify what was apparently disadvantageous for retail class. This change is expected to benefit retail investors especially for the upcoming issues like UCO Bank or Vijaya Bank for instance. Further, just as institutions are permitted to revise bids in a book-built issue, even retail investors can do the same. Thus it puts the retail investors on par with institutions.

A larger slice for the retail

It plans to raise the allocation for retail investors by 10%, correspondingly reducing the allocation for qualified institutional buyers (QIBs) by 10%. This will bring down the maximum share of allocation for QIBs from the mandatory 60% to 50%, on par with retail investors. Besides, it ruled that institutions could not withdraw their bids in a book-building issue anymore. Prior to this change, institutional bidders could tie up with the lead book running managers and submit inflated bids thus creating an artificial demand and price for the issue. This would mislead the gullible investors to go into an overdrive over the issue and then the institutional bidder could easily withdraw its bid, leaving the small investors in the dock. Regulators hope that mischievous bids will be curbed by this step.

>>>>>>>>>>>>>>>>>>>>Greenshoe option allowed

In a vital change, it allowed Greenshoe option in book-building initial public offers to the extent of a maximum of 15%. Basically, the Greenshoe option gives the issuer company a right to allot an additional 15% of equity. This option can be exercised by the company but in case of extra demand due to over subscription, as witnessed in the case of Maruti issue, this option loses its relevance. So, Sebi’s new move will ensure price stability, so that the usual volatility in the first few days of listing is curbed. Besides, another stipulation to list book-built IPOs within 6 days instead of earlier 15 days of the closure of the issue will benefit investors in two ways. First, it’ll ensure there’s no artificial market between the issue closing date and the date of listing and second, investors’ money will not remain locked in for a longer period of time.

Price band introduced

Another positive step taken by SEBI is the setting up of a price band, which will assist the retail participants in placing their bids. This would act as a good guidance for the retail investor in placing the bid, as the previous method had a flaw in the sense that a floor price was fixed below which the bidder was not allowed to bid while there was no upper limit to the bid price. This would often leave an investor guessing as to what should be the price at which he should be placing his bid so as to get a pie of the allotment. However, this shortcoming has also been taken care of. Now the investor knows the upper limit and can place the bid at the upper end of the price band if he finds it is worth it. Therefore, the risk of overpricing his bid has been reduced to some extent. While these new norms are yet to be formally notified to stock exchanges, the optimism of the investors’ has sure gone up on the back of hopes of a more transparent book building process; but as we all know caution shares the same platform with optimism. No one really knows what all these initiatives will deliver after implementation. However, one thing is certain: the desire of investors to test their luck in primary market is more controlled now. Well, more fair too.

Answer 2

Green Shoe Option Meaning

Answer 3

'Products' and 'materials' are not the right approach. To be entirely green, you need to ditch materialism and live as simply as you possibly can. Don't buy ANYTHING unless you absolutely HAVE to. Mande is talking rubbish and obviously knows very little about true green concepts. EATING is not a problem if you do so in harmony with the environment. The greenest way to eat is by producing all the food yourself on your own organic land. That's a big deal, obviously, for most modern people, but you could go a long way by growing all your own veg and keeping a few chickens - pigs too if you have space or maybe even a cow - and foregoing anything you can't produce. EXCREMENT can be safely composted and its goodness returned to the earth - if you're careful and do it right. (Google 'The Humanure Handbook'.) It's much better to use it to replenish the soil than to treat it with chemicals and flush it out to sea. SHELTER doesn't have to be environmentally unfriendly. Try a tipi. Or a house made of straw bales or cob. (Straw bale houses are more flameproof than timber houses, warmer - therefore using far less gas or electricity - quieter, and lock up carbon that would otherwise be burned and released into the atmosphere.) The world is here for us to make use of its resources. We can take what we need from it without harm, as long as we live in harmony with it by giving back to it as well. Now, assuming you're not about to buy a plot of land, build a straw house and start a self-sufficient mini farm (my dream life, btw), the main steps you can take are to BUY as little as possible, cut your electricity and gas use as far as possible, sell the car, and start growing veg. Eco-friendly products are all very well but they are still chemicals that needn't be there - we're TOO careful these days about killing every single bacteria in the house. Most things can be cleaned with a good dose of vinegar or bicarb - and they come in plastic bottles, which only have to be thrown away again. And recycling's all very well, but it uses up such a ridiculous amount of energy that in some cases it's actually more environmentally friendly NOT to do it. Hope I helped.