Proposed Rules for Price Stabilization of Securities and "The Greenshoe Option”

Proshare

Monday, March 26, 2018  05.02PM / Proshare Research / NSE 

Last week, after the publication of the Proposes Rules for Price Stabilization of Securities’, not a few member of the investment community raised the question: What is the NSE doing here? 

We sought to know and reached out to the Nigerian Stock Exchange rules unit, who were quite professional in their engagement on the matter. 

The NSE explains it thus further that ‘the stabilization of securities creates a regulatory framework for the buying of security for the limited purpose of preventing or retarding a decline in its open market price in order to facilitate its distribution to the public.’ 

According to investopedia, a  'Greenshoe Option' in security issues, is an over-allotment option. In the context of an initial public offering (IPO), it is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than originally planned by the issuer if the demand for a security issue proves higher than expected. 

Here, we publish a communication we hope will help shed more light on the intent and the process of the proposed rule. 

PRICE STABILIZATION RULES
(GREENSHOE OPTION)

A. Background:
A green shoe, or over-allotment, option is a permitted form of market stabilization activity to manage post-transaction volatility in the immediate aftermath of an equity transaction (when trading and free float turnover is most active). 

Greenshoe options are a common feature of international equity capital markets, offering transaction investors significant additional comfort around stable aftermarket performance.
 

The option grants an Issuing House the right to borrow shares equivalent to up-to Fifteen per cent (15%) of a transaction base deal size, from an identified holder of such shares or the Issuer, in order to facilitate an up-to Fifteen per cent (15%) over-allocation of the base deal size on The Nigerian Stock Exchange (“The NSE”) – creating an effective short position (the greenshoe option).
 

1. The short position would be closed through the purchase of shares through stabilization activity or the partial or full exercise of the option (following which the net proceeds of the exercise and/or shares purchased in stabilization would be returned to the lending holder of shares or the Issuer, as appropriate.
 

A sole bank/Issuing House from the lead banking transaction syndicate is appointed to act as stabilization manager:

2. The stabilization manager undertakes and discloses stabilization activity undertaken.
 

3. The appointed stabilization trader within the bank is ring-fenced and wholly independent of normal course day-to-day trading in the stock that is subject to the green shoe option.

B. Typical features of a Greenshoe Option include:
• Maximum green shoe option equal to Fifteen per cent (15%) of equity transaction size. 

• Option can consist of either secondary (most common) or primary (less common) shares. 

• Price stabilization can only occur at the IPO price or below. 

• Shares bought back through stabilization activity cannot be resold to the market. 

• Stabilization activity limited to a Thirty (30) calendar day period following the transaction close. 

• Stabilization activity can continue until the earliest of  -

1. the end of the Thirty (30) day period, or
 

2. the exhaustion of the option (Fifteen per cent (15%) bought back in the market), or
 

3) the exercise of the option.
  

C. Key Objectives of a Greenshoe Option:
• Increase investor confidence regarding the aftermarket liquidity and performance – a common feature of international equity transactions. 

• To allow for purchase of secondary shares to support falling share price. 

• To allow for upsizing of a transaction by up to Fifteen per cent (15%), if exercised. 

• Strategy to counteract the heightened post-transaction volatility in the immediate transaction aftermarket.   

D.
 Process for the Greenshoe Option:  
Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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