Section 31 of Companies Act 2013

Section 31 of Companies Act 2013. Shelf Prospectus

(1) Any class or classes of companies, as the Securities and Exchange Board may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein which shall indicate a period not exceeding one year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required.

 (2) A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus: Provided that where a company or any other person has received applications for the allotment of securities along with advance payments of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as subscription within fifteen days thereof.

(3) Where an information memorandum is filed, every time an offer of securities is made under subsection (2), such memorandum together with the shelf prospectus shall be deemed to be a prospectus. Explanation.—For the purposes of this section, the expression “shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus”.

Scope of Section 31 of Companies Act

A shelf prospectus is a kind of prospectus which is defined as a regulatory document must be filed with the authority Security Exchange Board of India to offer securities it may decide to issue later on and raise capital for the company. Issuing Mutual funds also required a shelf prospectus.

Features of shelf prospectus

• It is a detailed and comprehensive document that discloses all relevant material information about the company and offers the document for potential investors to make informed decisions which is mandatory for most public issuance.
• It has 1-year validity and should be used within a maximum of 1 year.
• It contains all general information about future offerings.
• It does not include specific pricing information.
• It meets the purpose of offering flexibility for future security issuance.
• It helps to streamline the issuance process and saves costs.
• It helps to reduce the requirement of repeated prospectus preparation.

Issuance of Shelf Prospectus (Who is eligible to issue shelf prospectus?)

A publicly listed company can issue a shelf prospectus 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.

Let’s understand which listed companies fall under this category.

• Public listed companies ( those companies are listed on their securities on different stock exchanges in India like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), OR Calcutta Stock Exchange (CSE)
• Public Sector Banks
• Public Financial Institutions (PFIs) are companies wherein the Indian government holds more than 51% of the shares
• Non-Banking Finance Sector Companies (NBFCs).

Insurance companies cannot fall under the ambit of the Companies Act, 2013.

What is Information Memorandum (IM)?

To Section 31 of Companies Act 2013, companies that use a shelf prospectus for multiple securities issuances are mandatory to file an Information Memorandum (Form PAS-2) under specific circumstances. This needs to be done when there are material changes in the company’s financial position between the first prospectus filing and subsequent offerings under the same shelf prospectus.

Here, an Information Memorandum is required in the shelf prospectus when the second, third, and fourth issuances are made. The filing deadline for it shall be one month before the subsequent securities offering. The Information Memorandum must be attested by the Registrar of Companies (ROC), the Securities and Exchange Board of India (SEBI), and either the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE) To ensure compliance procedure. The applicable fee for filing the IM is currently set at ₹200,  as per relevant MCA Notifications. The Information Memorandum serves as a critical legal compliance to ensure transparency and investor protection when utilizing a shelf prospectus for multiple securities offerings.

Shelf prospectus and their issuance criteria under Section 31 of Companies Act

A shelf prospectus is used by a company that is seeking to raise capital through bonds, but it shall comply with the eligibility criteria to do so. A company can be eligible if it fulfills the below-given criteria.

1. Minimum Valuation: The company should have a valuation that must exceed Rs. 5,000 crores.
2. Dematerialization Agreement: For dematerialization of securities a formal agreement with SEBI is mandatory.
3. Credit Rating Requirement: The issued bonds should possess a credit rating of AA- or higher.
4. Clean Regulatory History: There should not be any existing pending regulatory action against the promoters or directors of the company. 
5. Consistent Debt Repayment: The company must have a consistent track record of timely repayments of debt.

Conclusion

The shelf prospectus serves the intention to raise a fund by selling its bonds and securities can file a shelf prospectus. It helps to see a broader picture of the company through plans, financial position, and the specifics of the securities on offer. Shelf prospectus offers transparency and assurance to investors. It also enables the company to disclose and wait for the intentions to issue new securities early and investors can wait for the right time to invest their money within the validity period.

FAQs

1. If an investor looking for a company offering securities through a Shelf Prospectus, what key information should he diligently scrutinise within the document?

If an Investor should diligently scrutinise details on financial health, risk factors, plans, use of proceeds, and any material changes since the initial offer.

2. As per Section 31 specifies that the validity of a Shelf Prospectus is up to one year. Does this, in your opinion, create any potential challenges for companies seeking long-term fundraising initiatives?

Yes, the one-year limit can hold back long-term plans. In such cases, Rolling Shelf Prospectuses could be a better option for companies.

3. The provision allows for subsequent issues under the same Shelf Prospectus without a new one. However, are there any updates or disclosures the company should consider of evolving circumstances during the validity period?

Yes, there is a procedure that companies must file information memoranda disclosing updates on finances, changes, and new risks before subsequent offerings.

4. As Section 31 prescribes an “information memorandum” that can be filed alongside the Shelf Prospectus. Can you clarify the purpose and significance of this document in terms of subsequent security offerings?

The information memorandum is an important document that fills the gap between the initial Shelf Prospectus and subsequent offerings. It helps investors be informed about crucial changes, promotes transparency, and simplifies the process for companies while upholding investor protection.

5. Being an informed investor, how would you compare the advantages and disadvantages of Shelf Prospectuses compared to traditional prospectuses for individual securities offerings?

The advantages are faster issuances and lower costs and the disadvantages are less detailed information and the potential for outdated information.