This article has been written by Ms.Anita Mariya,student studying BBA LLB from Government Law College Thrissur.The Author is a 5th year Law student.

Introduction

A shelf prospectus is a type of prospectus that is written by firms that issue many bonds to obtain cash. These corporations prepare shelf prospectuses in order to save time. A notification, advertisement, or other document that invites members of the public to acquire securities is referred to as a prospectus. Public limited companies are required to first publish a prospectus before they may sell securities. Every publicly traded company that intends to raise capital through more than one issue of bonds might publish what is known as a “shelf prospectus.” The filing of a Form PAS-2 Information Memorandum is required for businesses that distribute shelf prospectuses. A corporation is allowed to make an unlimited number of offerings of securities so long as just one prospectus needs to be filed. Nevertheless, organisations that only issue non-convertible bonds (bonds that cannot later be converted to company shares) are allowed to submit a shelf prospectus. This is because non-convertible bonds cannot be converted into company shares.

What exactly is meant by “Shelf Prospectus”?

A firm that wants to collect money from the general public is required to submit a prospectus to SEBI, which stands for the Securities and Exchanges Commission of India. In order for the firm to proceed with an initial public offering (IPO), it is required to file a red herring prospectus or an IPO prospectus, both of which provide extensive information on both the IPO and the company. When a publicly traded firm needs additional capital, one option available to them is to issue bonds. It is necessary for it to submit a shelf prospectus for this reason. This document will include comprehensive information on the securities that are being issued, such as their prices, dates of maturity, and other relevant details. This has two purposes: first, as a legal instrument, and second, as a marketing tool for the issuance of bonds.

As part of the procedure for initial registration, a prospectus is required to be submitted by any business that intends to offer any type of securities to the general public. For instance, a firm that wishes to sell its shares on the public market is required to prepare a prospectus (DRHP).

In India, a Form PAS-2 information memorandum is used to provide a shelf prospectus to the Securities and Exchange Board of India (SEBI). Only corporations that are available for public trading are allowed to submit an application.

After a company has submitted a shelf prospectus, it is exempt from the requirement to file subsequent prospectuses even if it later decides to offer the market a different kind of securities. With a shelf prospectus, a company is able to make up to four separate offerings of their securities before having to submit another shelf prospectus.

Shelf prospectuses are only available to publicly traded companies that want to raise money through the sale of non-convertible debt instruments. Debt bonds that are non-convertible cannot be exchanged for equity at any time.

Financial Securities

Whenever possible, a shelf prospectus will be published by a public corporation with the intention of selling bonds. On the other hand, the use of a shelf prospectus is not limited to the process of generating money through the issuance of bonds. Any company that desires to raise money through the sale of new shares of stock can do so by issuing what is known as a “shelf prospectus.”

Shelf prospectuses are also submitted by mutual funds. For instance, the shelf prospectus for a mutual fund is required to provide information about the fund’s investing strategies, objectives, and risks, among other things.

A shelf prospectus is a document that serves as a guidance for prospective investors. You may get more information about the company and the services it provides in order to assess whether or not investing in the firm would be suitable for your financial goals and the amount of risk you are willing to take.

It is possible for the material contained in the shelf prospectus to alter based on the company and the needs it has for its capital. The majority of shelf prospectuses, on the other hand, include information on the history of the firm, a financial overview, the kind of security, the issue size, the issue price, the number of shares, a risk profile, a sector analysis, and other related topics.

In most cases, the degree of risk and the kind of risk are highlighted in the original shelf prospectus, and further explanation of these aspects is provided during the application process. Investors are able to make decisions that are more informed thanks to the risk breakdown as well as the other information contained in the prospectus document. As the prospectus provides access to more financial data, you will have more information at your disposal with which to carry out your study.

Who Has the Authority to Publish a Shelf Prospectus?

The following categories of organisations are able to publish shelf prospectuses:

• Listed Companies: Businesses that have securities that are traded on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), or the Calcutta Stock Exchange (CSE) have the ability to raise capital by releasing a shelf prospectus.
• Public Financial Institutions (PFI): A Public Financial Institution is an entity in which the Central Government owns more than 51% of the paid-up shares. Public Financial Institutions are denoted by the abbreviation “PFI.” The Life Insurance Corporation of India, the Industrial Finance Corporation of India, and the Industrial Finance Corporation of India are all examples of public financial institutions in 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%. This ownership percentage must be met for a bank to be considered a public sector bank.
• Non-banking Financial Companies, often known as NBFCs, are a type of financial organisation that provides a wide range of banking services. Unfortunately, they do not have a licence to conduct banking operations.

Criteria for Businesses

A corporation is required to satisfy a number of conditions before it can initiate the registration process necessary to issue shares and submit a shelf prospectus. The following are the qualifications for businesses:

• The company’s values need to be at least 5,000 crores, which is the Indian currency.
• The company is going to have to come up with an agreement to dematerialize securities and then submit it to a SEBI.
• The firm has to demonstrate that it has been profitable for the past three years.
• The corporation is obligated to guarantee that the securities it issues have a credit rating of at least AA- or higher. • The promoters and directors of the corporation must not be the subject of any pending or completed regulatory actions. Under any and all circumstances, the corporation does not meet the requirements for a shelf prospectus.

In order to subscribe to securities, the business is required to have a merchant banker who is registered with SEBI. Moreover, in the case that debentures are issued, the corporation is required to have chosen a trustee for the debentures.

• Over the previous three years, the organisation must not have made a significant number of mistakes in relation to the return of deposits. • Throughout the previous three years, the firm should have maintained the integrity of its listing agreement.

What are the Benefits of Using a Shelf Prospectus?

Bonds are investments that have a low level of risk but have the potential to provide better returns than alternatives such as fixed deposits. When you buy a bond, you will be entitled to interest payments up to the maturity date and your initial investment back after the bond has reached its full term. In addition, the involvement of SEBI in the issuance of a bond through a shelf prospectus might give you the confidence that the bond enjoys a high degree of trust among investors. Because of this, the level of risk associated with your investment will be significantly reduced. Yet, this does not mean that they are entirely risk-free choices for financial investments.

Before granting approval for a shelf prospectus, SEBI must first carry out in-depth investigations of the firm and the securities it offers. This results in a reduction in the amount of labour that is necessary for investors to certify that the securities are readable. Prior to making an investment in bonds, it is essential to check if the purchase of a bond issued by a certain company is compatible with your investment horizon.

A shelf prospectus is a document that provides assistance to regulatory authorities in determining the credibility of organisations who are offering securities. You may effectively analyse a company’s security based on its compliance with a number of rules and standards by using the prospectus document. The information that is provided in this prospectus about the company, as well as its directors and promoters, enables potential investors to evaluate the level of risk that is connected to the securities that are being sold. Hence, using the information included in the shelf document, you are able to do an analysis of the financials and other hazards.

References

1. Corporate cases.com
2. Indiainfoline.com
3. Ipleader.in