What is a Shelf Prospectus?

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Before you get to know what a shelf prospectus is, you need a little background. You may know what an IPO is, and know that the acronym stands for initial public offering. This event occurs when a private company wishes to offer its shares to the public for the first time and get listed on the stock exchange.  

In order for potential investors to invest in the company, the company generates what is called a prospectus – the Draft Red Herring Prospectus . This is a detailed document containing all there is to know about the company and its operations, including financials, fundamental aspects of business, performance indicators, etc. A company issues an IPO as it may want to expand its operations and raise funds for this purpose or any other purpose. Some companies do not offer shares in an IPO, but other securities like bonds, to raise capital. Such companies are already listed and may want to raise funds by offering bonds.

 

What is a Shelf Prospectus

A shelf prospectus is generated by any company that wishes to issue bonds in an IPO. Bonds are essentially debt instruments. They typically work on a principle similar to loans, and a company issues bonds for the purpose of borrowing money from a lender, the holder of the bonds. When a company issues bonds to a bondholder, it promises to pay a certain fixed amount of interest earned on the principal amount. The rate of interest, in terms of bonds, is known as a coupon.  

Additional Read:How does an IPO work? 

Now, before you learn about a shelf prospectus, you need to know about a prospectus in general terms. In financial terms, a prospectus is a legal document that is generated by a company. It is first submitted to the main market regulator in India, the Securities and Exchange Board of India (SEBI). The prospectus contains all the information about a company that is issuing the securities (bonds in the case of a shelf prospectus). It also contains relevant details about the actual issuance of the bonds regarding pricing, important dates, the issue, and other features. There are various kinds of prospectus that are dependent on the securities a company is issuing. In the case of bond issuance, the prospectus issued is called a shelf prospectus. The said company that creates a shelf prospectus does so when it issues non-convertible debt bonds only. Such a bond cannot be changed to share capital . When a shelf prospectus is issued by a company, it is permitted to raise capital four times.  

Who Generates a Shelf Prospectus?

Now that you have grasped the shelf prospectus meaning, you should know who is eligible to generate it. The following listed companies are permitted to issue a shelf prospectus:  

  • NBFCs or Non-Banking Financial Companies
  • PFIs or Public Financial institutions (companies where the Government of India holds above 51% stake)
  • Publicly Listed Companies (those whose stocks are listed on stock exchanges like the BSE and the NSE)
  • Public Sector Banks

What are the Criteria for Issuing a Shelf Prospectus?

A company must possess the eligibility to raise funds via bonds. Certain criteria must be met for companies to do this: 

  • An agreement with the Securities and Exchange Board of India (SEBI) must be submitted for the dematerialisation of securities. 
  • The company must possess a valuation equal to ₹5,000 crore.
  • Any pending regulatory action against the directors or promoters of the company should not be present.
  • The company has to ensure that the bonds it is issuing come with a credit rating of AA- or more. 
  • The company has to maintain consistency in the repayment of debt instalments. 

Additional Read: How to apply for an IPO?

The Advantages

The Securities and Exchange Board of India will approve a shelf prospectus only when it is sure that the bonds being offered by the said company are of a credible nature. That is, the bonds or any other securities issued should not produce a risk for potential investors. Therefore, the securities that are backed by a solid company mean that the company’s shelf prospectus has met with the most stringent approval process. This means that investors can have faith in the company they are investing in and be assured of returns through interest payments. Nonetheless, the shelf prospectus of any company should be assessed before you invest in it. 

Besides the benefit of being a relatively safe investment stream to consider, bonds with an approved shelf prospectus give investors the chance to scrutinise the company in great detail through the prospectus. The shelf prospectus offers all the information required to conduct a fundamental analysis and make sure of the investment from all angles. 

Final Lines

Any investor would want to analyse the securities they wish to invest in and a shelf prospectus gives investors this opportunity. Since it contains every detail about the company whose bonds you may consider investing in, you can be sure to make a thorough check of the company through the shelf prospectus, making sure that your investment is potentially sound. 

The shelf prospectus has all the information about the company that you need to research before you invest, including the reasons for the raising of capital and data about the company’s financials. These are crucial aspects of a company that must be taken into consideration before you make an investment decision. Apart from this, the shelf prospectus being approved by the Securities and Exchange Board of India is a bonus ensuring the potential safety of the bonds you may want to invest in. 


*Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only*

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