What is a Prospectus? –
The prospectus is a legal document that describes the company’s financial securities available for purchase by investors. It is a legal document that details the features, prospects, and promise of a financial product for market participants and investors to explore. It is required by law to be provided to potential customers. Abridged prospectus, deemed prospectus, red herring prospectus, and shelf prospectus are the four types of prospectus listed in the Companies Act of 2013.
Importance of prospectus-
- To make the public aware of the problem
- To reflect the company’s position on the terms of the offering and the allotment process.
- To ensure that the company’s directors and promoters are held accountable.
What is the Meaning of Shelf Prospectus? –
A shelf prospectus is a form of prospectus used by corporations who want to raise money by issuing several bonds. A prospectus is a notice, advertisement, or other document that invites the general public to invest in securities.
Before issuing securities, public limited businesses must first issue a prospectus. Any public limited corporation can issue a shelf prospectus to raise cash through several bond issuance. Companies that issue a shelf prospectus must file a Form PAS-2 Information Memorandum.
Shelf Prospectus is stated under section 31 of the Companies Act 2013. It is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year.
Shelf Prospectus definition and applicability as per Companies Act, 2013:
- Any class or classes of companies may file a shelf prospectus with the Registrar at the time of the first offer of securities enclosed therein, as per Securities and Exchange Board regulations, which shall imply a timeline not exceeding one year as the duration of validity of such prospectus, which shall state from the opening date of the initial offer of securities listed in that prospectus, & w.r.t second or subsequent offer of such securities issued
- Before the issuance of a second or subsequent offer of securities listed I a company filing such a prospectus will be required to file an information memorandum with the Registrar within the specified time period, containing all practical facts relating to new changes created, changes in the company’s financial position that have occurred between the initial offer of securities or the erstwhile offer of securities and the succeeding offer of same, and such other changes as prescribed.
Provided that where a company has received an application of securities’ allotment along with the advance payments of subscription prior to the making of any said change, the company shall prompt the changes to such applicants & if they intend to withdraw their application, the company shall refund all the received funds as a subscription within fifteen days thereof.
- Where the filing of information memorandum is done, every time an offer of securities is made as per subsection (2), such memorandum in addition to the shelf prospectus shall be considered to be a prospectus
In simple terms “shelf prospectus” refers to a prospectus in which the securities or class of securities covered in the prospectus are issued for subscription in one or more issues over a period of time without the need for a new prospectus.
Conditions for Issuing Shelf Prospectus–
There are some conditions that need to be fulfilled for issuing shelf prospectus, those are as follows-
- The entity’s net worth must exceed Rs.500 crores.
- During the previous three years, the company should have made a profit.
- The entity should have a dematerialization agreement in place with a SEBI-registered depository.
- For the subscription of securities, the entity must have a SEBI-registered merchant banker
- If debentures are issued, the entity should appoint a debenture trustee.
Entities Required to Publish Shelf Prospectuses –
- Public Financial Institutions (PFIs): entities in which the Central Government owns more than 51% of the paid-up share. Public financial institutions include the Life Insurance Corporation of India, the Industrial Finance Corporation of India, and the Industrial Finance Corporation of India.
- Public sector banks are those in which the direct ownership of the state/central government or other public sector banks is 51 percent or more.
- Non-banking Finance Companies: NBFCs are financial institutions that provide a variety of banking services but do not have a banking license.
- A listed firm is one whose securities are traded on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), or the Calcutta Stock Exchange (CSE)