Like a pixie drunk on the nectar of Rhododendrons, stock prices may oscillate, plummet or shoot up and fly away. This is not always desirable for the human machinations that power the financial markets. In certain circumstances, such as the issue of new shares, the fluidity of the capital market must be stabilised. Such stabilisation manipulates the market, but is a "safe harbour" from penalisation for market abuse.
This manipulation may seem like financial black magic. Yet the Financial Services Authority and other regulators justify it as necessary for promoting an orderly operation of the market, as well as reducing investor nervousness and preventing short selling. Apparently, the market as a whole benefits, since investor security in the stability of securities encourages its use for capital gain.
When a new issue of security (e.g. shares) is placed on the market, there may be an offer period during which those shares can be bought at a certain price. Investors are less likely to purchase shares if during that offer period the share price greatly fluctuates. Therefore, it is helpful to stabilise the price.
On an issue of shares a stabilising manager (i.e. underwriter) may over-allocate the securities to investors to ensure that the entire issue is purchased (a bit like airplane tickets by flight companies). The stabilising manager may increase the number of shares available if the demand goes up, and thereby stabilise the price before the end of the offer period.
A Greenshoe is this market pixie which was discovered in the United States in an issue of shares for the Green Shoe Company. It is essentially a call option which allows the stabilising manager to purchase an agreed number of extra shares in order to balance any short-fall as a result of over-allocation. The agreed amount of extra shares is usually around 15% of the issue.
This mechanism protects the stabilising manager from having to purchase shares that have risen above the offer price. However, the golden heel is that a green shoe does not come into effect if the market price falls below the offer price, as the stabilising manager may purchase his shares at this lower price.
The stabilising manager usually exercises the greenshoe at the end of the stabilising period, just before the closing of the offer. Some issuers prefer not to include greenshoe options where the issuer wants to fund a specific project with a fixed amount of cost and do not want any additional capital.
The FSA appear uncharacteristically uncertain as to the meaning of "Refreshing the Greenshoe". Corporate Blawg UK has interpreted the meaning as basically using the Greenshoe option more than once (e.g. by reselling the underwriter's Greenshoe stock and purchasing more shares under the call option). Despite being unclear as to its meaning, the FSA has taken the view that selling securities which have been acquired through stabilising purchases can not be categorised as being in a safe harbour from market abuse accusations. However, the FSA cowers behind the caveat that this does not mean that the behaviour is itself abusive and such sales should be constructed in a way to minimise market impact.
For some bed-time reading, the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005 (S.I. 2005/381) contains the current price stabilisation rules, which came in to force on 1 July 2005.
Do you have any more information about the green shoe in the specific case of Telmex or Telefonos de Mexico,when Carlos Slim was buying this public company the stock value was 2.50 USD per share and using this technique obtained millions of dollars.thanks
Posted by: Ramon Jimenez | 03 May 2007 at 01:09 AM
Do you have any more information about the green shoe in the specific case of Telmex or Telefonos de Mexico,when Carlos Slim was buying this public company the stock value was 2.50 USD per share and using this technique obtained millions of dollars.thanks
Posted by: Ramon Jimenez | 03 May 2007 at 01:10 AM
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