what is green shoe option in an IPO ? How does it work with the help of an worked out example?
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A ‘green shoe option’ in an IPO allows the issuing company to offer more shares than the original prospectus amount if the deal is heavily over subscribed.
Example: a company files to sell 10 million shares in an IPO with a 10% green show option; if the deal has large demand they have the option to issue an additional 1 million shares (10% of the original 10 million).
I believe the Green Shoe Company was the first company to include such a clause in their offering, hence the name.
The company going for public issue can allot more shares than advertised in case of oversubscription. It does not require any example.