On January 5, China Mobile was listed on the main board of Shanghai Stock Exchange. As of that day, the closing share price was 57.88 yuan / share, a slight increase of 0.52%. Insiders generally believe that the rise of China Mobile’s share price is related to the introduction of green shoe mechanism.
China Mobile is the 11th “wearing green shoes” listed new stock in Shanghai and Shenzhen. As a sharp weapon to protect large cap stocks, the green shoe mechanism is equivalent to insuring new shares, giving investors confidence and avoiding the risk of new shares breaking in the short term. After the break, the green shoe mechanism can also provide sufficient funds to “support the market” and stabilize the stock price.
At present, 61 listed companies in the A-share market have introduced the green shoe mechanism, including 11 in Shanghai and Shenzhen and 50 in Beijing stock exchange (all introduced when listing the selected layer). From the future performance, the green shoe mechanism has played a role in stabilizing the stock price.
According to the data of Securities Daily, from the stock price performance on the first day of listing, of the above 61 companies, only 8 broke on the first day of listing, and 45 rose, accounting for 74%. Among them, the share prices of 16 companies increased by more than 100% on the first day of listing, accounting for 26%, and the highest increase was close to 500%. In terms of the rise and fall of share prices 30 days after listing, only 11 of the 61 companies fell and 47 rose, accounting for 77%. Among them, 12 companies increased by more than 100%, accounting for 20%, and the highest was more than 500%.
Industry experts generally believe that with the implementation of the registration system in the whole market and the normalization of the breaking of new shares, the green shoe mechanism is expected to be widely used and become a normalization mechanism to stabilize the stock price. However, it should be noted that although the green shoe mechanism can stabilize the stock price in the short term, it can not be done once and for all. The most important factor to stabilize the share price of new shares is that the pricing of new shares is more real and reasonable.
in 20 years, only 11 Shanghai and Shenzhen companies “wear green shoes”
Green shoe mechanism refers to the over allotment option. The underwriter of new shares who obtains this right can over sell no more than 15% of the issued shares at the same price. The final result of over allotment will be determined after the end of the post market stability period (generally 30 natural days from the date of listing) according to the market conditions.
As for how to use green shoes to stabilize the stock price, the Underwriters will choose to exercise or not to exercise green shoes according to the stock price performance of new shares. In the issuance process, the underwriter completes the issuance of green shoes by “borrowing” shares from investors and “borrowing” this part of the shares (no more than 15%).
Generally speaking, in the future stable period, if the share price of new shares breaks, the underwriter will choose not to use the green shoes, but to buy the shares of green shoes at a low price from the secondary market and return them to the “borrowed shares” investors; If the share price is always higher than the issue price, the underwriter will choose to exercise the green shoes and directly issue the shares of green shoes at the issue price lower than the market price.
It can be seen that the exercise of the green shoe mechanism can slow down the decline of the stock price to a certain extent or maintain the stock price at a level not lower than the issue price, and play a role in stabilizing the stock price in the short term.
In the overseas capital market, the application of green shoe mechanism has been more extensive and mature, but it is somewhat “unknown” in China.
In fact, the implementation of the green shoe mechanism in the A-share market is not late. In September 2001, the CSRC issued the opinions on the pilot of over allotment option, which put forward the specific norms in the implementation of the green shoe mechanism for the first time. However, from 2001 to 2005, no company in the A-share market adopted the green shoe mechanism.
Until 2006, the CSRC promulgated the new measures for the administration of securities issuance and underwriting, which specifically stipulated the requirements for the issuance volume (no less than 400 million shares). At the end of October of the same year, Industrial And Commercial Bank Of China Limited(601398) officially landed on the main board of Shanghai Stock Exchange and became the first new share of A-Shares to be listed in “wearing green shoes”. In terms of market performance, its share price rose by more than 5% on the first day of listing and more than 20% on the 30th day after listing. The green shoe mechanism has indeed played a role in stabilizing the stock price.
Thus, green shoes officially entered the market, but the expected popularity did not appear. After a lapse of four years, the green shoe mechanism was introduced when Agricultural Bank Of China Limited(601288) and China Everbright Bank Company Limited Co.Ltd(601818) were listed on the main board of Shanghai stock market in 2010, which effectively guaranteed the stock price on the first day of listing and in the stable period in the future. Since then, the green shoe mechanism disappeared again. Until December 2019, Postal Savings Bank Of China Co.Ltd(601658) was listed and became the fourth new share of A-Shares with green shoe mechanism.
At present, 11 listed companies in Shanghai and Shenzhen have introduced the green shoe mechanism, of which 6 companies such as Industrial And Commercial Bank Of China Limited(601398) are from the main board of Shanghai stock market and 5 companies such as China Resources Microelectronics Limited(688396) are from the science and innovation board. There is no company “wearing green shoes” in Shenzhen.
In addition, the selected layer of the new third board has become the stage for the “big show” of the green shoe mechanism. Many enterprises, including Wantong hydraulic and Changfu shares, have adopted the green shoe mechanism, which has an obvious effect on stabilizing the stock price. After the opening of the Beijing stock exchange, the above selected enterprises were listed horizontally, and the widely used green shoe mechanism has also become a major feature of the Beijing stock exchange.
why is it difficult for “green shoes” to appear in Shanghai and Shenzhen?
Why is it difficult to see new shares “wearing green shoes” in Shanghai and Shenzhen? High threshold or is a major influencing factor. According to relevant regulations, the Shanghai and Shenzhen main board requires the issuance of new shares using the green shoe mechanism to be more than 400 million shares; Although the requirements of the science and innovation board are reduced, the proposed minimum threshold is “80 million shares + 1.5 billion yuan”, which has stopped many listed companies.
In addition, some industry experts said that there were few new shares broken under the previous approval system, and there was no need to introduce the green shoe mechanism to stabilize the stock price.
“Under the traditional approval system, new shares are scarce resources. After listing, they rarely break, and the effect of making new money is obvious. Therefore, before that, few enterprises introduced the green shoe mechanism to insure the stock price, and only a few large blue chips used green shoes in the issuance.” Liu Jiwu, deputy general manager of the Securities Investment Banking Department of the Federal Reserve, said in an interview with the Securities Daily.
“Under the approval system, the pricing of new shares is deterministic, and there are restrictions on the rise and fall of the share price since the first day of listing. Therefore, the internal driving force for the issuer and the lead underwriter to stabilize the share price through the green shoe mechanism is insufficient.” The head of the capital market department of Minmetals securities told the Securities Daily.
“As a protective measure to stabilize the stock price, the green shoe mechanism has less room to play in the actual operation of a shares.” Lawyer Luo Han, partner of Zhide law firm, told reporters that the pricing of new shares in the history of A-Shares is mostly determined through independent negotiation between the issuer and the lead underwriter. The degree of marketization is low, and the breaking of new shares is rare.
In addition, there are also voices that the difference between the green shoe mechanism at home and abroad causes the lack of motivation of underwriters, which has become a major factor hindering the application of the green shoe mechanism.
“The A-share underwriter has no real right of return on the price difference obtained by its active ‘market support’.” Luo Han said that according to relevant regulations, if the green shoe mechanism is applicable to the issuance of new shares, the underwriters have the right to actively buy back the issuer’s shares with the raised funds from over allotment when the new shares are broken by reaching a delayed delivery agreement with strategic investors, so as to play the role of “supporting the market”. Underwriters who buy stocks in the secondary market to obtain a “price difference” need to be turned over and included in the Securities Investor Protection Fund.
Some experts believe that the relevant institutional arrangements for A-Shares are mainly to protect the rights and interests of investors.
“As for the income attribution under the green shoe mechanism, A-Shares have adopted the institutional arrangement that the ‘price difference’ is fully included in the Securities Investor Protection Fund.” Dr. Ma Guoan, a law professor at Shanghai University of Finance and economics, told the Securities Daily that Chinese regulators attach great importance to investor protection and include it in the Securities Investor Protection Fund in full, which is conducive to preventing the issue pricing from being too high. As the rules of A-share system are not yet mature, if the income is distributed to securities companies, securities companies may increase the breaking probability by raising the issue price, so as to earn the price difference in the secondary market. The securities investor protection fund with income included is used to prevent and deal with the risks of securities companies for the purpose of protecting the legitimate rights and interests of investors. Therefore, this system is more conducive to protecting the legitimate rights and interests of investors.
50 companies of Beijing stock exchange introduced the green shoe mechanism
Compared with Shanghai and Shenzhen stock markets, there are significantly more companies introducing the green shoe mechanism in the Beijing stock exchange, but they all occur before the translational listing, that is, when they are listed on the selected layer of the new third board. According to the statistics of Securities Daily, 50 of the 82 listed companies on the Beijing stock exchange have introduced the green shoe mechanism, accounting for 61%.
In this regard, Zhou Yunnan, founder of Beijing Nanshan investment, told the Securities Daily that the first 32 selected enterprises did not choose the green shoe mechanism. After their centralized listing, there was a large-scale break. In view of this market situation, the national stock transfer company began to vigorously promote the implementation of the green shoe mechanism in the selected layer of the new third board. Since August 2020, the content of the green shoe mechanism has been generally added to the inquiry letter of the applicant enterprises at the selected layer. Subsequently, the enterprises approved in the second round of selection layer made it clear to use the green shoe mechanism.
“The breaking and inactive trading of the first batch of selected layer enterprises has affected investors’ confidence in the selected layer. At this time, the application of green shoe mechanism is particularly important, which can improve the market’s expectation of the whole selected layer.” Zhou Yunnan said.
The application of green shoe mechanism can enhance investors’ confidence in participating in innovation, enhance their enthusiasm, reduce the risk of stock issuance, and realize the smooth transition of stock price from primary market to secondary market.
“After the listing of the first batch of selected companies on the new third board, there was a large-scale break. Many investors were afraid and their enthusiasm for the purchase of selected companies decreased. In order to reduce the break probability and improve market activity, the second batch of selected companies on the new third board began to adopt the green shoe mechanism, and this system also continued to the Beijing stock exchange.” The management of a small and medium-sized securities firm told the Securities Daily.
“At that time, the first batch of selected layer enterprises broke in a large area, with great pressure from all parties in the market and obvious wait-and-see attitude of investors. In order to avoid the risk of breaking, the subsequent selected layer enterprises successively introduced the green shoe mechanism, which adjusted the short-term market price of stocks to a certain extent and maintained the stability of the market.” Liu Jiwu said.
In addition, Zhou Yunnan said that there is no implementation threshold for the selected layer green shoes mechanism and no specific requirements for the issuance quantity, which has also become an important reason for the popularity of green shoes. Green shoe funds enter the site to protect the disk, which can reduce the breaking probability and shorten the breaking duration. At the same time, green shoe funds buy stocks from the secondary market at the time of breaking, which can activate trading, stabilize stock prices and ensure the stability of the secondary market.
enterprises “wear green shoes” under the registration system may become a trend
The central economic work conference held in 2021 stressed that “the stock issuance registration system shall be fully implemented”. Under the registration system, the pricing of new shares will be more market-oriented, and more and more new shares will break on the first day of listing, which gives more room for the green shoe mechanism to play.
Industry experts generally believe that with the implementation of the registration system in the whole market, “green shoes” is expected to develop into a normalization mechanism, enhance investor confidence and stabilize the share price of new shares.
“When the possibility of breaking new shares increases, more issuers and sponsors will choose the green shoe mechanism to stabilize the stock price. More and more new shares may use the green shoe mechanism later, and it is expected to become a normalization mechanism.” Liu Jiwu said that the green shoe mechanism has the unique advantages of appropriately adjusting the issuance scale, reducing the fluctuation of IPO, achieving win-win results and effectively reducing the risk of IPO. It plays a supporting role in maintaining the stability of stock prices and may be more and more widely used.
“With the effective improvement of the A-share market-oriented pricing mechanism, the green shoe mechanism is expected to be fully implemented in the market.” Luo Han said that for enterprises with high breaking risk, the green shoe mechanism is an important measure to stabilize the stock price when issuing new shares. Market-oriented issuance pricing is the premise for the green shoe mechanism to play its role. Since the issuance of the new inquiry regulations, the cases of green shoe mechanism in the issuance of A-share new shares have generally increased.
Zhou Yunnan said that with the comprehensive promotion of the reform of the registration system, the green shoe mechanism will be introduced into the public offering of new shares more frequently. However, the green shoe mechanism is not a mandatory supporting measure for public offering. It is necessary to prevent individual issuers from deliberately raising the issuance price by taking advantage of the backing effect of the green shoe mechanism. At the same time, investors should also note that the green shoe mechanism can only reduce the breaking probability and can not prevent the breaking.
“The full implementation of the green shoe mechanism in the future should be a general trend, but it remains to be seen whether it will be adopted by most companies.” The management of the above-mentioned securities companies said that when the number of shares issued is small, starting the green shoe mechanism has little effect on the stability of the stock price in the secondary market. If the enterprise fundamentals are general, the future sustainable profitability is not recognized, the market is unstable or there are many investors abandoning the purchase, then the risk of issuance still exists.
“The green shoe mechanism only has a stabilizing effect on the short-term stock price, and it can’t be done once and for all in the long run.” Liu Jiwu said.
The above-mentioned person in charge of Minmetals Securities believes that “the green shoe mechanism can not affect the medium and long-term price fluctuations in the secondary market, and the long-term operating performance of listed companies is still an important factor affecting their stock price trend. The most important thing for IPO pricing is to balance the interests of issuers, investors and underwriters, rather than relying too much on the green shoe mechanism.”
(Securities Daily)
