What is Shelf Prospectus?

Take any company that you are familiar with and use products of, you will realize that it launches new products after a while. It is a form of business expansion that is inevitable in most companies, and this is considered the key to tackling competition and ensuring sustainability. However, expanding is not as easy. Every company that wants to expand requires huge capital to do so, and the profits they are making may not be enough to fund their future operations.

Many companies generally raise huge funds to aid expansion and other efforts through Initial Public Offering, where a company offers its shares to the public for the first time. But what about a company that is already public and wants to raise funds further? That is when they use Bonds.

Bonds are debt instruments, which implies that they work on the principle of loans, where a company issues bonds to borrow money from the lender, also called the bondholder. The company promises the lender a regular predetermined interest on the principal amount. In bond terms, this interest rate is called a coupon.

If you are an investor, you can consider investing in the company through the way of multiple fundraising issues. However, it is vital to know everything about the issue to execute the technical or fundamental analysis. Investors look towards the shelf prospectus to find all the information about the bonds’ issue.

What is a Shelf Prospectus?

Before you learn about shelf prospectus meaning, you need to understand the meaning of a prospectus in financial terms. A prospectus is a legal document submitted by a company to SEBI that contains all the information regarding the securities issue. Every company must submit the prospectus before raising any funds. It provides a detailed outline of the company, the issue, the prices, dates, and features.

Among the various types of a prospectus, a shelf prospectus is issued by a company that is planning multiple issues of bonds for raising funds from the public. A shelf prospectus can only be issued by a publicly listed company, and it is done by filing an information memorandum in Form PAS-2.

A shelf prospectus can only be issued by a company if it is raising funds through non-convertible debt bonds. A non-convertible debt bond can’t be converted into share capital. With the issue of a shelf prospectus, a company can issue securities to raise funds four times.

The information mentioned in the shelf prospectus may vary based on the company and its fund requirements. However, most shelf prospectuses include information regarding the background of the company, financial summary, type of security, issue size, issue price, number of securities, risk profile, sector analysis, etc.

Who can issue a shelf prospectus?

A shelf prospectus can be issued by the below-listed companies:

• Public Financial Institutions (PFIs) (companies in which the Indian government holds more than 51% of the shares)

• Non-banking Finance Companies (NBFCs)

• Public Sector Banks

• Publicly Listed Companies (companies that have their securities listed on stock exchanges such as National Stock Exchange (NSE), Bombay Stock Exchange (BSE), or the Calcutta Stock Exchange (CSE).

Criteria for companies to issue the Shelf Prospectus

A company must be eligible to raise capital through bonds. Here are the criteria for companies that can issue a shelf prospectus:

• The company must have a valuation of Rs 5,000 crores and above.

• The company should submit an agreement with SEBI for the dematerialization of securities.

• The company must ensure that the bonds it is issuing have an AA- or above credit rating.

• There should not be any pending regulatory action against the promoters or the directors of the company.

• The company must be consistent in repaying the installments of debt.

Shelf Prospectus and financial securities

Generally, a publicly listed company issues a shelf prospectus when it is trying to raise funds through bonds. However, a shelf prospectus is not limited to raising funds through bonds. Any company can issue a shelf prospectus if it is trying to raise funds by issuing more equity. Furthermore, issuing mutual funds also requires a detailed shelf prospectus. For mutual funds, a shelf prospectus offers information on the funds’ goals, risks, fees, investment strategies, etc. Before investing in a mutual fund, an investor can analyze the shelf prospectus to understand everything about the fund and then make informed investing decisions.

Benefits of Shelf Prospects

A shelf prospectus is only approved by SEBI when it is sure that the securities being offered by the company are credible and won’t create a high-risk profile for the investors. Since the approval of the shelf prospectus means that the securities are backed by a well-positioned company to offer good returns to investors, investors can consider investing in the securities. However, it is also good to analyze the shelf prospectus in detail before investing.

The shelf prospectus offers every detail possible to the investor who is looking to invest in the securities. It ensures that the investors have all the information possible to do a detailed fundamental analysis of the company and ensure they are investing in low-risk securities. As, in the shelf prospectus, it is also mentioned why the company is issuing the securities, an investor can analyze the goal of the fundraising. For example, it is always better than a company raises funds to fund its future operations or for expansion rather than repaying its debts.

The details included by a company in a shelf prospectus are reviewed and cross-checked by SEBI before it approves the issue. Investors too can ensure that they review and analyze every detail and only invest in a fundamentally sound company that can offer good returns over time by increasing its profitability.

Final Word

A shelf prospectus can prove to be the holy grail for an investor who wants to perform a fundamental analysis on a company to decide whether to invest in the securities issue. As a company also raises funds if they are in a bad financial position and want to repay its debt, it is always wise to review the draft prospectus thoroughly before deciding to invest. If you think that the company is profitable, has less debt, and is looking to use the raised capital for expanding, you can go ahead and invest in the new securities issue. For applying to such securities, you will need a trading account and you can open a free trading account by visiting IIFL’s website or downloading the IIFL Markets app from the app store.