What is Shelf Prospectus?
To raise funds from the public, a company must file a prospectus with SEBI or the Securities and Exchanges Commission of India. If the company wishes to conduct an initial public offering, it must submit a red herring prospectus or IPO prospectus that describes the IPO and the company in detail. When a listed company wants to raise funds, it can sell bonds. For this purpose, it must file a shelf prospectus. This document will provide complete information about the securities being issued, including their price, maturity date, etc. This serves both as a legal document and a marketing tool for the bond offering.
A corporation seeking to provide any form of securities to the public must submit a prospectus as part of the initial registration procedure. For example, a company seeking to offer publicly traded stocks must submit a prospectus (DRHP).
In India, a shelf prospectus is submitted to SEBI through a Form PAS-2 information memorandum. Only publicly traded corporations are eligible to apply.
Once a firm submits a shelf prospectus, it does not need to submit additional prospectuses if it seeks to offer a new type of security to the market. With a shelf prospectus, companies can offer securities up to four times before submitting another shelf prospectus.
A public company can only issue a shelf prospectus if it sells non-convertible debt instruments to raise capital. Non-convertible debt bonds cannot be converted into equity.
A public company that wishes to issue bonds will typically issue a shelf prospectus. However, a shelf prospectus is not confined to raising capital through a bond issue. Any corporation can issue a shelf prospectus if it wishes to raise capital through the issuance of additional equity.
Mutual funds also file a shelf prospectus. For example, a mutual fund’s shelf prospectus must provide information on the fund’s objectives, investment methods, risks, etc.
A shelf prospectus acts as a guide for investors. You can learn more about the company and their offerings to determine if investing in it aligns with your investment objectives and risk tolerance levels.
The information included in the shelf prospectus may change depending on the company and its capital requirements. However, most shelf prospectuses provide information about the company’s history, financial summary, kind of security, issue size, issue price, number of shares, risk profile, sector analysis, and so on.
Mainly, the degree and kind of risk are typically highlighted in the initial shelf prospectus and elaborated further during the application process. This risk breakdown and other information in the prospectus document enable investors to make more informed decisions. Since the prospectus gives access to additional financial data with which you can conduct your analysis.
Who Can Issue Shelf Prospectus?
The following types of entities can issue a shelf prospectus:
- Listed Companies: Firms whose securities trade on the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and Calcutta Stock Exchange (CSE) can raise money by issuing a shelf prospectus.
- Public Financial Institutions (PFI): Public Financial Institutions are entities in which the Central Government owns more than 51% of the paid-up shares. PFIs include Life Insurance Corporation of India, Industrial Finance Corporation of India, and Industrial Finance Corporation of India.
- Public Sector Banks: Public sector banks are banks in which the direct ownership by the State or Central Government or other public sector banks is at least 51%.
- Non-banking Finance Companies (NBFCs): NBFCs are financial institutions that offer various banking services. However, they do not hold a banking license.
Criteria for Companies
Before submitting a shelf prospectus and initiating registration to offer shares, a company must fulfil certain requirements. Following are the criteria for companies:
- The company’s valuations must be INR 5,000 crores or more.
- The corporation must create and file an agreement to dematerialize securities with a SEBI.
- For the last three years, the company must have shown profits.
- The company must ensure that the securities it issues have a credit rating of at least AA- or higher.
- Promoters and directors must not have any regulatory action against them. In case of any, the company doesn’t qualify for shelf prospectus.
- The entity must have a merchant banker registered with SEBI for the subscription of securities.
- In the event that debentures are issued, the entity must have selected a debenture trustee.
- During the previous three years, the organization must not have made many errors in regard to the repayment of deposits.
- In the preceding three years, the company should have upheld the integrity of its listing agreement.
How is a Shelf Prospectus Useful?
Bonds are low-risk investments that can provide higher yields than alternatives such as fixed deposits. When you purchase a bond, you will get interest payments until the maturity and the initial investment upon maturity. In addition, by issuing a bond through a shelf prospectus, you may be confident that it has a high level of trust due to SEBI’s involvement. This will ensure that your investment isn’t highly risky. However, it doesn’t mean that they are zero-risk investment options.
Before approving a shelf prospectus, SEBI conducts comprehensive inspections of the company and its securities. This reduces the work required by investors to guarantee the securities are legible. Before investing in bonds, it is prudent to confirm that purchasing a particular company’s bond matches your investment horizon.
A shelf prospectus is a document that assists regulators in ensuring that companies issuing the securities are credible. You can use the prospectus document to efficiently evaluate a firm’s security through several regulations and requirements. This prospectus contains information on the firm, its directors and promoters, allowing investors to assess the risk associated with the offered securities. Thus, you can analyze the financials and other risks using the information in the shelf document.