Technically known as an over-allotment option, a green shoe is a part of underwriting agreement, through which the issuer can distribute additional shares. The additional amount is typically 15%.
The Green Shoe Manufacturing Company was the first one to use this concept, and this is where the name comes from!
Points to remember:
A Green Shoe option can be used only if the public demand for shares increases more than expected.
It is the only way that is permitted by SEBI to stabilize the prices after the offering price is decided, by the underwriter.