What is a Shelf Prospectus?

  •  4 min read
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  • 28 Nov 2023

When a company intends to raise funds through the issuance of securities, it must comply with various legal requirements to ensure transparency and safeguard the interests of investors. One crucial regulatory document in this process is the shelf prospectus. So, what is a shelf prospectus and its various other aspects? Let’s find out.

In the process of going public for the first time, a company issues shares through an Initial Public Offering (IPO) to raise funds. Conversely, a company that is already publicly traded can raise funds by selling bonds. Any company seeking to raise funds publicly must file a prospectus with the market regulator, SEBI (Securities & Exchange Board of India).

While a company launching IPO files a Red Herring Prospectus, a company issuing bonds is required to file a shelf prospectus. The prospectus will encompass comprehensive information about the issued bonds, including crucial details such as prices, maturity dates, and more. It serves a dual purpose as a legal document and a marketing tool for the bonds.

The entities which can issue this prospectus are:

  • A listed company whose stocks are trading on stock exchanges
  • Public sector banks
  • Non-banking financial companies
  • Public financial institutions where the government owns 51% of shares

To issue a shelf prospectus, a company must fulfill these criteria

  • The company's market value should be at least Rs. 500 crores or above
  • The bond's credit ratings must be AA or more
  • The company needs to submit an agreement with SEBI which confirms dematerialisation of securities
  • Consistent debt payment records
  • No pending regulatory actions against the promoters and directors of the company

The content of a shelf prospectus varies depending on the type of security being offered, resulting in potential differences across prospectuses. However, certain specific pieces of information are mandated for a company to include in the prospectus to facilitate the public offering of securities.

A prospectus necessitates the inclusion of fundamental details such as the company's name, financial information, and a concise overview of the company's background. Furthermore, the prospectus must specify the type of securities being offered and indicate whether the offering is intended to be private or public.

Additionally, the company must disclose the number of securities being offered, provide the names of the company's principals, and furnish details about the underwriter or syndicate involved in offering the securities.

SEBI approves a shelf prospectus only when it is confident that the company's offered securities are credible and do not pose a high-risk profile for investors. The approval signifies that the securities are supported by a well-established company capable of providing favorable returns to investors. Consequently, investors may consider investing in these securities. Nonetheless, conducting a thorough analysis of the shelf prospectus is advisable before making any investment decisions.

The shelf prospectus provides investors with comprehensive information to facilitate a detailed fundamental analysis of the company. It ensures that investors can access all the necessary information to assess and choose low-risk securities. Furthermore, the shelf prospectus outlines the purpose of the securities issuance, allowing investors to evaluate the fundraising objectives. For instance, investors prefer companies raising funds for future operations or expansion rather than debt repayment.

SEBI thoroughly reviews and cross-checks the information presented in a company's shelf prospectus before approving the offering. Similarly, investors should diligently review and analyze each detail to invest solely in companies with solid fundamentals, capable of generating consistent profitability and delivering attractive returns over time.

To Conclude

If you are seeking to conduct a fundamental analysis of a company to make an investment decision, you can find a shelf prospectus to be highly valuable. It is advisable to carefully examine the draft prospectus, especially when a company aims to raise funds to address financial challenges or repay debts.

Thoroughly reviewing the prospectus can help determine if the company is profitable, possesses manageable levels of debt, and intends to utilize the raised capital for expansion. If these factors align with your investment criteria, proceeding with investing in the new securities issue may be a prudent choice.

FAQs

When a company that is already public raises funds by selling bonds, it issues a shelf prospectus with details of the bonds, including their prices, maturity date, etc. At the same time, a company trying to raise funds by issuing more equity can also give a shelf prospectus.

Its validity is of maximum 1 year.

No. There’s no need for a separate prospectus for second, third or subsequent offer.

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