What Is A Shelf Prospectus

What Is a Bond?

A bond is a fixed-income instrument companies, and governments use to raise capital. In simple terms, it is a loan they take from investors. The borrowers issue bonds at a specified interest rate in exchange for bonds. Lenders earn interest till the maturity of the bonds. Upon maturity, the lenders or the investors get their initial investment back. 

Bonds are debt instruments. Financial experts suggest having a mix of debt and equity in an individual's investment portfolio. At a time when the stock market is crashing, debt instruments are considered to be safe options. They help balance out the portfolio and limit your losses.

Shelf Prospectus Meaning

In India, SEBI is a regulatory body that controls the securities market. It protects the interests of the investors and has several regulations in place to ensure this. One such requirement is that of a shelf prospectus.

It is a document that contains details about the company and the securities it offers to investors. This document helps the investors understand the company's financials to make an informed decision. 

A company has to submit the shelf prospectus when it is planning to offer bonds to raise funds from investors. It is a part of the initial registration process before it can proceed with these in the market.

Once a company has submitted its shelf prospectus, it can issue its securities four times. For more securities, the company has to share another shelf prospectus.

This document contains all the information about the securities, such as the price, maturity date, etc. It acts as a legal and marketing document to communicate the details to the investors. 

Which Organisations Can Issue a Shelf Prospectus?

SEBI has restricted the type of organizations/institutions that can issue bonds and hence have to submit the shelf prospectus. Here is a list of such companies.

• Public sector banks
• A company that is publicly listed and whose shares are available in the stock market for trading
• A public financial institution or PFI. These are the companies in which the government has more than 51% of the shares
• Non-banking financial corporations or NBFCs

Apart from this, here are a few other criteria for the company to submit a shelf prospectus and issue bonds:

• The market value of the company should exceed Rs.5000 crores
• It must have already submitted an agreement for dematerializing its securities
• The credit rating of the bonds must be AA- or better. This rating is considered to be a good rating
• There should be no pending legal action by SBI on the company or its regulators
• The company has to pay the interest to the investors consistently without delay

How Is a Shelf Prospectus Useful for an Investor? 

Bonds are ideal for investors who have a low-risk tolerance. They offer better returns compared to fixed deposits. The interest rate is set, and it helps the investor make an informed decision. 

Although bonds are low-risk, a shelf prospectus gives all the more assurance to the investor that the investment is safe. As the SEBI is involved and the shelf prospectus has been filed, the investors can take it for granted that the bond's rating is good. 

When a company files for a shelf prospectus, SEBI does due diligence before approving it. There are various checks in this process to ascertain everything is in place. SEBI has several rules and guidelines to evaluate the specifics of the company. 

Apart from the financials, the shelf prospectus also contains information about the directors and promoters to evaluate the risks further.

This process assures the investors and gives them the confidence to invest without any doubts. However, it is always advisable to do one's research to invest as per your goals.

Significance of Shelf Prospectus for Public Ltd Company 

A public limited company in India is defined under The Company Act 2013. It is a company that has limited liability. The public can buy its stocks through IPO or via the stock market.

A company can have the need to raise capital to fund business expansion, takeovers, or new product launches. Bonds are one way to raise these funds instead of approaching the banks to get long-term working capital.

Bonds allow flexibility to companies and save them from floating interest rates. Firstly, the company does not have to subscribe to high-interest rate loans for funding from banks. Secondly, the company can structure the bonds as per its requirement. For instance, some bonds are convertible and can be exchanged for shares in the future.

Content Takeaways

Bonds are a lucrative investment option for individuals. If you plan to do the same, you can refer to the shelf prospectus guide above to make an informed decision and enhance the quality of your life