What is Shelf Prospectus?

November 17, 2022

Shelf Prospectus

This article seeks to elucidate the concept of shelf Prospectus.

Introduction

Any company that you are familiar with and whose products you use will eventually provide new offerings, you can be sure of that. In most businesses, it is an inevitable kind of business expansion, and this is seen as being essential to fending off competition and guaranteeing sustainability. But expanding is more difficult. Every business that wants to grow needs a significant amount of capital, and the earnings they are now making might not be enough to support their future operations.

Through an initial public offering, where an organization first offers its shares to the public, many businesses typically raise enormous sums of money to support expansion and other initiatives. But what if a business is already publicly traded and seeks further funding? They employ bonds at that time. Investors consult the shelf prospectus to get all the details on the issuance of the bonds.

Let us understand what does the term shelf Prospectus means.

What is shelf Prospectus

A prospectus that has been issued by a public financial institution, business, or bank for one or more of the issues of securities or classes of securities specified in the prospectus is known as a shelf prospectus. When a shelf prospectus is released, the issuer can sell or offer securities without releasing another prospectus, eliminating the need for the issuer to issue a separate prospectus for each offering.

Section 31 of the Companies Act,2013 discusses the provisions relating to shelf prospectuses.

The Securities and Exchange Board of India will issue the rules for any class or classes of organizations that are eligible to submit a shelf prospectus at the time of the first sale of securities to the registrar.

The prospectus must specify its validity duration, which should not be longer than one year. This time frame starts on the first day of the initial offering of the securities. There is no need for a new prospectus for every second or subsequent offer.

A corporation must submit an information memorandum along with its shelf prospectus filing.

Information Memorandum

It is necessary for the company submitting a shelf prospectus to also submit an information memo. It should include all relevant information about the newly incurred costs and any changes to the company’s financial situation after the first offer of the security or between the two offers.

According to Rule 4CCA of Section 60A(3) of the Companies (Central Government’s) General Rules and Forms, 1956, it must be lodged with the registrar three months prior to the issuance of the second or subsequent offer made under the shelf prospectus.

Any organisation or person that has received a request for the allocation of securities with a subscription advance payment before any changes have been made is required to notify them of those changes. The money must be returned to them if the applicant decides to withdraw their application within 15 days.

If a securities offer is made after the information memorandum has been filed, both the memorandum and the shelf prospectus are regarded as prospectuses.

Who can issue shelf Prospectus

An organisation of the following categories may publish a shelf prospectus:

Companies that are listed on a stock exchange, such as the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), or the Calcutta Stock Exchange (CSE), may raise money by publishing a shelf prospectus.
PFIs (public financial institutions) are businesses in which the federal government holds a majority stake—more than 51% of the fully paid shares. There are PFIs such as the Life Insurance Corporation of India, the Industrial Finance Corporation of India, and others.
Public sector banks are those in which the State, the Central Government, or other public sector banks directly possess at least 51% of the institution.
Non-banking Finance Companies (NBFCs) are businesses that provide a range of banking services. They do not, however, hold banking license.

Criteria for Companies

A corporation must meet certain standards before submitting a shelf prospectus and starting the registration process to offer shares. The parameters for companies are as follows:

The company must be valued at at least INR 5,000 crores.
The corporation is required to write 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 is ineligible for a shelf prospectus.
For the subscription of securities, the entity must have a merchant banker registered with SEBI.
The corporation must have chosen a debenture trustee before issuing any debentures.
The corporation must not have made many mistakes when it came to deposit repayment throughout the previous three years.
The corporation was responsible for upholding the integrity of its listing agreements during the previous three years.

How is a shelf Prospectus useful?

A shelf prospectus can only be approved by SEBI if it is certain that the securities the company is offering are reliable and won’t put investors at significant risk. Investors should think about investing in the securities because the shelf prospectus’ approval indicates that the securities are backed by a strong corporation that can provide them with good returns. Before investing, it is wise to carefully review the shelf prospectus, nevertheless.

The shelf prospectus provides every piece of information to the investor intending to purchase the securities. It makes sure that the investors have all the data they need to do a thorough fundamental examination of the business and confirm that they are purchasing low-risk assets.

An investor can evaluate the purpose of the fundraising because the shelf prospectus also explains why the company is offering the securities. For instance, it is always preferable for a business to raise money to finance its expansion or future operations than paying down its debts.

SEBI reviews and double-checks the information provided by a company in a shelf prospectus before approving the offering. Investors can make sure that they thoroughly examine and evaluate every aspect and only invest in a fundamentally strong business that can provide profitable returns over the long term.

Conclusion

All forms of securities may be issued under a shelf prospectus, as allowed by Section 31 of the Companies Act of 2013, but SEBI has only permitted the issuing of non-convertible debentures. It’s time for the capital markets regulator to permit businesses to submit shelf prospectuses for equity share issuances to the public. It would not only make it easier and faster to raise money from the public, but it will also assist revive India’s flagging equities capital markets.

References

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November 17, 2022