What is a Shelf Prospectus, Criteria and How Can it Benefit an Investor?
A company going public for the first time issues shares through IPO for raising fund. Similarly, when a company which is already public, can raise funds by selling bonds. Now any company that wants to raise funds publicly, has to file a prospectus with the market regulator, SEBI (Securities & Exchange Board of India).
While a company which launches an IPO, files Red Herring Prospectus, a company issuing bonds has to file a shelf prospectus.
Now why is this necessary? Let’s find out more about it.
What is Shelf Prospectus?
A company must file a shelf prospectus if it wants to issue bonds to raise funds. This prospectus will contain all the details regarding the securities being issued such as their prices, maturity date, etc. This serves as both a legal and marketing document for the bonds.
A company can issue securities for up to 4 times by filing a prospectus one time. But organisations that only issue non-convertible bonds (that cannot be converted to company shares later) are allowed to file a shelf prospectus.
An Indian company has to file the shelf prospectus to SEBI has to file an information memorandum in the Form PAS-2. Only publicly listed companies can file this prospectus.
What is Information Memorandum?
There might be some changes in the financial situation of the company after it has filed the prospectus. The company should notify the Registrar of Companies (ROC) about these changes. For this purpose, it has to file an Information Memorandum in Form PAS-2. Form PAS-2 should be filed with attestation from the ROC, the SEBI, and the NSE or BSE.
A company should file this memorandum on 2nd, 3rd and 4th issues of securities made under the same shelf prospectus. It should be filed at least a month before issuing the securities.
Applicable fee is ₹200 as per the appropriate MCA Notification.
If the company has received funds from any applicant before the changes were issued, it should inform the applicant/s about the same. If the applicant wants to withdraw his/her subscription after being notified about the changes, the company has to refund the amount within 15 days.
Who Can Issue Shelf Prospectus?
Some points have already been mentioned above about a company which can issue a shelf prospectus. Now, here are the types of entities that can file one:
- A publicly listed company that has its shares trading on stock exchanges in India
- Public sector banks
- Non-banking financial corporations (NBFC)
- Public financial institution (the government owns 51% of shares of these companies)
How Does an Investor Benefit from a Shelf Prospectus?
A shelf prospectus offers a guarantee to the investors that the securities issued are of credible nature as it has passed the securing authority, i.e., SEBI. An investor can get details of a company from its prospectus such as its promoters and directors.
Such information can help an investor assess the risk before investing in the securities. They can also check whether investing in the securities match their risk appetite and investment goal.
As an investor, you should consider gathering and assessing such details before investing.
What Are the Criteria for a Company to Issue a Shelf Prospectus?
A company has to meet the following criteria to be eligible to issue a shelf prospectus:
- The company must have a market value of ₹500 crore and above.
- The bonds must have a credit rating of AA- and more.
- A company has to submit an agreement with SEBI confirming dematerialisation of securities.
- The concerned company must have a consistent record of repayment of debts.
- The promoters and directors of the company should not have any pending regulatory actions against them.
Financial Securities and Shelf Prospectus
Typically, a company trying to raise funds by selling its bonds and securities has to file a shelf prospectus. However, its function is not limited to this. A company trying to raise funds by issuing more equity can file a shelf prospectus as well.
Additionally, issuing mutual funds also require shelf prospectus. A mutual fund’s shelf prospectus contains information on the fund’s risk, goals, investment strategies, fees, etc. A potential investor should go through this prospectus before investing in a mutual fund to make an informed decision.
What Are the Requirements for Shelf Prospectus?
The details which a shelf prospectus will contain vary from one security to another. Hence, the information may differ across the prospectus. But there are some specific information that a company has to provide in a prospectus in order to make the securities public.
A company has to mention basic details such as its name, financial details and a brief background of the company. Additionally, it has to mention the type of securities that it is offering and whether it intends to make the offering private or public. Added to that, the company has to mention the number of securities, names of the company’s principals and details of the underwriter or syndicate of the security offered.
Filing a shelf prospectus with SEBI offers transparency and assurance to investors. It aids an investor in making an informed decision. An investor should consider going through the prospectus of the issuing company to make an informed decision.