Understanding a Shelf Prospectus

April 6, 2023

This article has been written by Ms. Aarsha Prem, a 5^th year LL.B. student from CLS GIBS college.

Understanding a Shelf prospectus

Introduction

A publicly listed firm may sell bonds to raise money. It is required to file a shelf prospectus for this reason. The price, maturity date, and other pertinent details concerning the securities being issued will all be included in this document. This is used to advertise the bond offering and as a legal document. Millions of people connect and trade publicly traded stocks on the stock market every day. Based on their technical and fundamental analyses, investors try to buy stocks in the anticipation that the price will increase and, when that occurs, look to sell their shares for a profit. How can an investor obtain information about a business issuing securities in order to do the aforementioned technical fundamental analysis? This information comes from a shelf prospectus. A shelf prospectus is a document that authorities use to confirm the legitimacy of the companies issuing the securities. A prospectus can be used to effectively assess a company’s security through several rules and specifications. Investors can evaluate the risk associated with the offered securities by using the information in this prospectus about the company, its directors, and promoters. Thus, you can use the data in the shelf prospectus to examine the finances and other threats.

What is a shelf prospectus?

A prospectus is a statement of intent to sell securities to the general public that is submitted to SEBI. You as a trader can use the information in this document to help you decide whether to invest in the securities the company is providing. It offers a variety of information about the firm and the securities it is offering. A corporation must file a prospectus as part of the initial registration procedure in order to provide any kind of security to the public, such as stocks that will be traded publicly. The advantage of a shelf prospectus is that after submitting it, a corporation won’t need to file another prospectus every time it wants to release a new class of security on the market. Companies can issue securities using a shelf prospectus up to four times before needing to submit another shelf prospectus to offer more securities. A prospectus is required to be submitted as part of the initial registration process by any corporation wishing to offer securities of any kind to the general public. For instance, a business offering publicly traded stocks is required to prepare a prospectus (DRHP).

When submitting a shelf prospectus to SEBI in India, use Form PAS-2 Information Memorandum. Only publicly traded companies may submit an application.

If a publicly traded corporation wants to raise money, it can only do so by selling non-convertible debt securities. Bonds that are non-convertible cannot be changed into equity.

Entities Mandated To Issue Shelf Prospectus

The following criteria of entities hare allowed the authority to issue a shelf prospectus:

Public Financial Institutions (PFIs) are organisations whose paid-up share is purchased to a greater extent than 51% by the Central Government. Examples of public financial institutions are Life Insurance Corporation of India, Industrial Finance Corporation of India, and Industrial Finance Corporation of India.
Public Sector Banks: Those banks that have at least a 51% direct ownership by State/Central Government or other Public Sector Banks.
Non-banking Finance Companies (NBFCs) are financial institutions that offer a variety of banking services but lack a banking licence.
Listed businesses: A corporation that is listed on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and the Calcutta Stock Exchange has its securities listed there (CSE).

Conditions For Issuing A Shelf Prospectus

The parameters for companies are as follows:

The company must be valued at at least INR 5,000 crores.
The corporation is required to prepare and submit to a SEBI an agreement to dematerialize securities.
The business must have generated profits over the previous three years.
It is the responsibility of the corporation to make sure that the securities it issues have a credit rating of at least AA- or better.
There cannot be any regulatory action taken against promoters or directors. If any, the corporation becomes ineligible to qualify for a shelf prospectus.
For the subscription of securities, the entity must have a merchant banker registered with SEBI.
The entity shall have appointed a debenture trustee in the event that debentures are issued.
The company must not have made many mistakes when it came to the refund of deposits over the previous three years.
The corporation need to have kept the integrity of its listing agreement throughout the previous three years.

Option for Withdrawal

The applicants should be made aware of any changes to the company’s financial structure if the company raised the funds from the general public before doing so.

Upon learning this information, the applicants might request a refund of their money. In such cases, the business shall finish the refunding procedure in fifteen days.

A corporation must submit a prospectus to SEBI, the Securities and Exchanges Commission of India, in order to raise money from the general public. The company must submit a red herring prospectus, also known as an IPO prospectus, that extensively details the IPO and the company if it intends to make an initial public offering.

How is a Shelf Prospectus Useful?

Bonds are low-risk investments that can deliver better yields than alternatives such as fixed deposits. When you buy a bond, you will receive interest payments up until maturity as well as your initial investment back. You may also be sure that a bond you issue through a shelf prospectus has a high level of trust because SEBI is involved. By doing this, you may make sure that your investment isn’t very dangerous. But that does not imply that they are risk-free investing solutions.

SEBI thoroughly inspects the company and its securities before approving a shelf prospectus. Investors now need to do less work to make sure the securities are legible. It is wise to make sure that buying a particular company’s bond fits your financial horizon before making a bond purchase. A shelf prospectus will often be published by a publicly traded firm that wants to issue bonds. A shelf prospectus, however, is not limited to capital raising through a bond issue. If a corporation wants to raise money by issuing more equity, it may do so by publishing a shelf prospectus.

Depending on the company and its capital requirements, the content in the shelf prospectus may change. However, the majority of shelf prospectuses offer details on the company’s background, financial overview, kind of security, size, price, and number of shares, as well as risk profile and industry analysis.

Conclusion

A shelf prospectus aids authorities in determining whether the company issuing the securities have a solid reputation, which then transfers to the securities they are marketing. Via a shelf prospectus, a firm can be quickly but effectively examined according to a set of norms, specifications, and standards. It does, however, also benefit investors. Investors can evaluate the risk connected with the securities being offered by reading the information in a shelf prospectus about the firm, its directors, and promoters. It is crucial for investors to carefully evaluate the organisation they are buying securities from as well as the securities themselves. The degree and nature of risk are typically described in the initial shelf prospectus for most securities, and they are further fleshed upon during the application process. Investors can make more educated decisions since they have access to more financial information to use in their analysis thanks to this breakdown of the risk associated in a shelf prospectus.

References

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April 6, 2023