Many investors may know that the role of a stabilising manager is basically to support the IPO’s stock price.
However, they may not fully understand the implication of this action.
Some are not too sure how long the manager will continue to support the share price and they have also been wondering what will happen to the stock’s price once the manager stops supporting the price of the stock.
Some investors may assume that it is quite safe to buy into IPOs that have price stabilising managers as the stock prices will not drop for a short period of time, which is during the 30-day stabilising period.
However, certain investors may think that activities from these managers may imply a certain form of “price manipulation”.
The post-IPO price may not reflect the true value of a company as the stock’s price is not freely determined by market forces.
Given that some newly listed IPOs are relatively overpriced, investors are concerned that the stock prices may move in an adverse direction upon the end of the price stabilisation period.
Investors need to understand that not all of newly listed companies have price stabilising managers.
Under the Capital Market and Services (Price Stabilizing Mechanism) Regulations 2008, an IPO issuer may appoint a stabilising manager, who may undertake stabilising action in an attempt to prevent or minimise the reduction in the stock’s price.
The price stabilising activities are also referred to as the “greenshoe” option or “over-allotment option”.
It allows underwriters to sell additional shares in a registered securities offering, at the offer price, if the demand for the securities is in excess of the original amount offered.
The option normally allows investors to buy up to 15% of the original number of shares offered.
The name of greenshoe is derived from the Green Shoe Manufacturing Co, a boot maker established in 1919 in the United States. It is the first company to allow underwriters to use this practice in its offering.
The greenshoe option is a mechanism to provide additional price stability to a security issue as it enables underwriters to increase or reduce the supply of shares to initial public demand.
If the market price of the shares exceeds the institutional price, the underwriters can exercise the greenshoe option to buy back the shares from the company’s owners at the offer price.
If the market price of the share drops below the offering price of the company, the underwriters will buy back the shares at the offer price and return the shares to the issuer.
The exercise of the greenshoe option will not increase the total number of shares issued.
Besides, the stabilising manager can exercise the option from the first 30 days of the trading debut.
The greeshoe option is available for an IPO not only from Malaysia, but also from Shanghai, China and Singapore.
Recent IPOs like Agricultural Bank of China in China and Tiger Airway in Singapore engaged these price-stabilising managers.
We notice that the greenshoe option is available mostly for big IPO issues where the share offerings may involve some book building exercises. As compared to the recent overall market valuation, the offer prices for new IPOs appeared to be more expensive.
Due to the greenshoe option, the stock prices of these newly listed companies are likely to be relatively stable in the first 30 days of trading.
However, as mentioned earlier, investors are more concerned about the direction of a stock’s price at the post-price stabilisation period.
As investors, they need to understand that buying into newly listed companies cannot guarantee fast profit within a short period of time.
Investors still need to check the fundamentals of the company.
If the fundamentals of the companies are solid, the stock price will remain stable or may even trend higher.
However, if the market views the stock’s price as expensive and that the business prospects are not promising, ultimately the stock’s price will still go down to the overall market average.
Lastly, apart from the above-mentioned benefits, we think the greenshoe option provides opportunities to investors to reconsider their purchases into these IPOs.
If investors feel that they have made the wrong purchases, they can still sell their IPOs at hand during the price stabilising period at minimal losses.
·OoiKokHwa is an investment adviser and managing partner of MRR Consulting.
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