A shelf prospectus is a specific type of prospectus issued by companies that intend to make multiple bond issuances to raise funds. A prospectus, in general, is a formal document, notice, or advertisement that invites the public to subscribe for securities, such as bonds or stocks. It is mandatory for public limited companies to release a prospectus before offering securities to the public. A shelf prospectus can be issued by any public limited company planning to raise funds through multiple bond issuances. Companies opting for a shelf prospectus are required to file an Information Memorandum in Form PAS-2.
The procedure for raising funds using a shelf prospectus is similar to raising debt funds, with the additional requirement of filing an Information Memorandum. In this blog, we will see an overview of shelf prospectus in India.
Significance of Shelf Prospectus in India for Public Limited Companies
Public limited companies play a vital role in the financial markets by issuing securities to raise capital. The release of a prospectus before issuing these securities holds significant importance. In this context, the concept of a shelf prospectus in India becomes crucial as it offers several advantages for companies and investors alike.
Public limited companies are obligated to release a prospectus before issuing securities. This requirement applies to any such company seeking funds through multiple bond issues. To meet this requirement, companies must file an Information Memorandum using form PAS-2. This process ensures transparency and disclosure of relevant information to potential investors. The role of shelf prospectus can be understood through the following:
Eliminating the Need for Multiple Prospectuses
One of the primary benefits of a shelf prospectus in India is that it prevents companies from having to issue a new prospectus every time they wish to offer securities. Instead, companies can streamline their offerings under a single shelf prospectus, reducing administrative burdens and costs.
Usage Limitations of Shelf Prospectus
A public limited company can utilise a shelf prospectus in India for a maximum of four issues of securities. This limitation ensures that companies do not indefinitely postpone their offerings under a single prospectus.
Shelf Prospectus Validity Period
Companies must use a shelf prospectus within a maximum period of one year from its issuance. This timeframe encourages companies to execute their planned offerings in a timely manner.
Exclusive to Non-Convertible Debt Bonds
Shelf prospectuses are exclusively applicable to entities issuing non-convertible debt bonds. These bonds, as the name implies, cannot be converted into share capital at a later date. This distinction ensures clarity in the types of securities covered by shelf prospectuses.
Fund Procurement Process via Shelf Prospectus in India
The process of raising funds through a shelf prospectus in India is similar to procuring debt funds. The primary difference lies in the additional requirement of filing an Information Memorandum. This memorandum enhances the transparency of the offering, providing investors with essential information.
Entities Mandated to Issue Shelf Prospectus in India
Shelf prospectuses offer a simple approach to securities offerings for specific types of entities in the financial sector. The following categories of organisations are mandated and authorised to issue a shelf prospectus:
1. Public Financial Institutions
Public Financial Institutions are entities whose paid-up share capital is acquired by the Central Government to the extent of more than 51%. Notable examples of Public Financial Institutions include the Life Insurance Corporation of India, the Industrial Finance Corporation of India. These entities are authorised to issue shelf prospectuses as a means of raising capital efficiently.
2. Public Sector Banks
Public sector banks are financial institutions where the direct holding of the State/Central Government or other public sector banks exceeds 51 percent. These banks are crucial components of India’s banking system. They have the authority to utilise shelf prospectuses when seeking to issue securities as part of their capital-raising initiatives.
3. Non-Banking Finance Companies
Non-Banking Finance Companies, commonly (NBFCs), are financial entities that provide a wide range of banking services but do not possess a banking licence. These organisations are an integral part of India’s financial sector. NBFCs are permitted to issue shelf prospectuses to efficiently raise capital and facilitate their financial activities.
4. Listed Companies
Listed companies are entities whose securities are traded on recognised stock exchanges such as the National Stock Exchange, Bombay Stock Exchange. They have the authority to issue shelf prospectuses to expedite subsequent securities offerings and streamline the fundraising process.
Shelf prospectus in India is therefore a valuable financial instrument for specific categories of entities in India, including Public Financial Institutions, Public Sector Banks, Non-Banking Finance Companies, and Listed Companies. These organisations can utilise shelf prospectuses to efficiently access capital markets, foster financial growth, and meet their funding requirements while adhering to regulatory guidelines.
Conditions for Issuing a Shelf Prospectus in India
For a company to be eligible for issuing a shelf prospectus in India, it must adhere to specific conditions set forth by regulatory authorities. These conditions ensure that the company has the financial stability, governance, and regulatory compliance necessary for efficient and transparent securities offerings. Here are the essential conditions:
1. Minimum Net Worth Requirement
The entity must possess a minimum net worth of over Rs. 500 crores. This financial threshold reflects the company’s financial strength and capacity to engage in securities offerings.
2. Profitability in the Last Three Years
The entity should have a track record of generating profits for the preceding three years. This requirement demonstrates the company’s financial stability and ability to service its securities.
3. Arrangement for Dematerialisation
The entity must have established arrangements for the dematerialisation of securities through a SEBI-registered depository. This condition aligns with modern financial practices and ensures efficient handling of securities.
4. SEBI-Registered Merchant Banker
A SEBI-registered merchant banker must be appointed by the entity for the subscription of securities. Merchant bankers play a critical role in managing the issuance process, underlining the importance of their registration.
5. Debenture Trustee for Debenture Issuance
If the company plans to issue debentures, it must appoint a debenture trustee. This trustee safeguards the interests of debenture holders, ensuring compliance with regulatory guidelines.
6. Minimum Credit Rating
The entity should have secured a credit rating of AA or higher from SEBI-registered credit rating agencies for its securities. This rating reflects the creditworthiness of the company and provides investors with an assessment of risk.
7. Clean Regulatory Compliance Record
The promoters or directors of the company must have a clean track record regarding compliance with regulatory requirements. This condition underscores the importance of ethical and transparent business practices.
8. Error-Free Deposit Repayment
The company should not have committed any errors in the repayment of deposits during the preceding three years. This requirement ensures that the company has a reliable track record of fulfilling financial obligations.
Adhering to these conditions is essential for a company seeking to issue a shelf prospectus in India. Meeting these requirements ensures that the company is well-prepared, financially stable, and compliant with regulatory standards, fostering investor confidence and facilitating efficient capital raising through securities offerings.
Role of the Information Memorandum in Shelf Prospectus Offerings in India
The Information Memorandum is a critical document in the context of shelf prospectus offerings. It serves several key roles in ensuring transparency and providing updated information to potential investors. It is significant due to the following factors:
1. Applicability of the Information Memorandum
The Information Memorandum is applicable in the context of securities issued under the shelf prospectus on the 2nd, 3rd, and 4th occasions. It ensures that investors receive updated information at key points during the securities issuance process.
2. Time Limit for Filing
The Information Memorandum must be filed with the Registrar of Companies at least one month before the issuance of the securities. This lead time allows for thorough review and dissemination of the updated information to potential investors.
3. Fees Payable
A nominal fee of INR 200, as per the relevant Ministry of Corporate Affairs notification, is payable for filing the Information Memorandum. This fee contributes to the administrative and regulatory processes associated with the issuance of securities.
4. Option for Withdrawal
In cases where the company has already raised funds from the general public before incorporating changes into its financial structure and subsequently disclosing them in the Information Memorandum, investors have the option to seek a refund. This provision ensures that investors have the choice to reconsider their investment decisions in light of the new information.
Final Thoughts
Shelf prospectus in India serves as an efficient mechanism for public limited companies to raise capital through multiple bond issuances while reducing administrative burdens. Entities mandated to issue shelf prospectuses, including public financial institutions, public sector banks, non-banking finance companies, and listed companies, play essential roles in India’s financial sector.
However, to qualify for a shelf prospectus in India, companies must meet stringent conditions, ensuring financial stability, regulatory compliance, and transparency. The Information Memorandum complements this process by promptly disclosing post-filing changes in the company’s financial position, providing investors with important information, and safeguarding their interests. Together, these elements promote responsible and ethical securities offerings in the market.
