What Is A Shelf Prospectus? What Are Its Benefits & Criteria?

Everything To Know About A Shelf Prospctus

Growing businesses need funding to manage growing operations, salaries, and marketing efforts. Without the required capital, surviving in the competitive market can become challenging. One of the most popular methods to raise these funds is issuing bonds. It is a regulated process and requires companies to publish their shelf prospectus.

This article has a detailed shelf description definition and additional information about bonds to help you develop a deeper understanding of the subject.

Benefits of Shelf Prospectus

Benefits of Shelf Prospectus (add new header)

1. Save Time and Money: Instead of filing a new prospectus every time they want to raise funds, companies can reuse the same one (within a set period). That means less paperwork, lower costs, and faster turnaround.

2. Easier Compliance: Once SEBI approves the shelf prospectus, the company only needs to submit an information memorandum for each new offer. Less hassle, same legal coverage.

3. Fundraising Flexibility: With a shelf prospectus ready, companies can launch new securities when the market looks right, no need to wait on new approvals.

4. Better Market Timing: Since the groundwork is already done, companies can strike while the iron's hot, getting better pricing and investor interest.

5. Transparent for Investors: Investors get the big picture right away through the initial prospectus, and each new issue includes updated details via memoranda, so there are no surprises.

Examples of Shelf Prospectus

Big names have already made good use of shelf prospectuses, especially for issuing debt instruments:

LIC Housing Finance Ltd. – Uses shelf filings for non-convertible debentures (NCDs).
NTPC Ltd. – Taps into the bond market using shelf filings.
IIFCL – Issues tax-free bonds to retail investors under this route.
NABARD – Raises funds for rural projects using shelf prospectuses.
 

Eligibility Criteria for Issuing a Shelf Prospectus

Not all companies are allowed to issue a shelf prospectus. The eligibility conditions set by SEBI and the Companies Act include:

1. Types of Securities: Typically allowed for non-convertible debentures (NCDs), bonds, and other debt instruments. Equity shares are not generally issued under a shelf prospectus.

2. Regulatory Approval: The issuer must receive approval from SEBI before filing the shelf prospectus.

3. Public Financial Institutions or Banks: Initially, this route was restricted to public financial institutions and banks. However, now even listed companies meeting SEBI’s criteria can issue shelf prospectuses.

4. Listed Companies with Strong Track Record: The issuer should have a track record of at least three years and must not be debarred from accessing the capital market.
 

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.

Between Shelf Prospectus vs Red Herring Prospectus

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

What Is the Time Limit for a Shelf Prospectus?

A shelf prospectus is valid for one year from the date of the first issue. During this time, the company can launch multiple offerings, called tranches, by simply submitting updated information each time. Once the year is up, the company has to file a new prospectus to continue raising funds.