Everything you need to know about Shelf Prospectus

A shelf prospectus is an important concept in Indian securities regulations. It allows companies to file a prospectus with SEBI and stock exchanges but defer issuing securities until later. Many major corporations use it as a strategic tool for efficient future fundraising. The section below will discuss everything you need about the shelf prospectus.

What is a shelf prospectus?

A shelf prospectus can be visualised as a metaphorical shelf where companies can temporarily park a prospectus filed with regulators. This allows them to issue securities as and when required within a predefined time frame without going through the elaborate prospectus filing exercise each time.

The mechanism provides corporations with the leeway to approach markets flexibly multiple times over 1 year from the date of filing the shelf prospectus.

Key benefits of filing a shelf prospectus

Shelf registrations offer several major advantages:

Speed and flexibility

• Companies can swiftly seize opportunities to raise capital by tapping markets when conditions are favourable.  
• Shelf filing enables much faster issuances of securities compared to normal public issue timelines. 
• It does away with the need to prepare offer documents from scratch each time by updating issue details in the shelf prospectus.
• Companies can time their issues based on market receptiveness and appetite.

Ease and cost savings

• Avoid repeatedly incurring significant costs and efforts in filing offer documents whenever they want to access capital markets.
• The shelf mechanism obviates appointing intermediaries like bankers, registrars, printers, advertising agencies, etc., separately for each issue. 
• Legal and regulatory overheads are lower since the bulk of the work is already done when filing the shelf prospectus.

Compliance benefits

• Shelf filings help comply with minimum public shareholding norms in a phased manner through timely OFS issues.
• Enables issuance of shares to employees through ESPS/ESOS schemes by updating offer terms.

Investor benefits

• Markets get a continuous flow of securities via multiple-tranche issuances rather than in bursts. 
• A shelf filing signals the company’s intent to tap markets through follow-on offers, providing cues to investors for better planning.

Contents of a shelf prospectus

A shelf prospectus contains all the disclosures, declarations and information as mandated in a normal prospectus for a public issue under company law and SEBI regulations. This includes:

1. Business overview

• Description of the company’s business model, products/services, operations, strengths and strategies
• Industry analysis covering outlook, opportunities, threats, competition, etc 
• Background of promoters, directors and management
• Financial highlights – key ratios, growth trends, segmental performance

2. Risk factors

All material business, organisational, regulatory and key person-level risks faced by the company

3. Financial statements 

• Key historical audited financial statements – P&L, Balance Sheet, Cash Flows
• Latest stub period financials, if applicable
• Management’s analysis of past financial performance  

4. Capital structure

• Share capital – history of equity issuances, details of shares issued in last 1 year
• Shareholding pattern of promoters and public
• Other instruments like warrants, convertibles, if any

5. Objects of the issue

• Stated objects for which funds are proposed to be raised
• Break up of costs and schedule of implementation.

History and corporate information

• Incorporation details and history of name changes, if any
• Major events, mergers, demergers, acquisitions, etc, since the incorporation
• Main objects and management details in MOA/AOA
• Change in activities, regulatory approvals if name changed in last 1 year

Legal and other information

• Details of all pending litigation and disputes
• Material contracts signed by the company 

Mechanics of issuances using shelf route

Here are the steps involved in issuances of securities by companies under a shelf prospectus:

1. Filing of draft shelf prospectus 

The company first filed a draft shelf prospectus with SEBI, and stock exchanges were listed. This draft contains standard disclosures mandated in a public issue prospectus.

2. Obtaining observations from SEBI

Within 30 days, SEBI issues its initial observations on the draft shelf prospectus filed. The company is required to address all queries and observations and clarify any additional information sought by SEBI through an updated draft shelf prospectus.

3. Final registration of shelf prospectus

Once all regulatory requirements are satisfied, SEBI registers the shelf prospectus. This now stands valid for a period of 1 year.

4. Filing shelf prospectus updation document

When the company decides to raise funds through the shelf route anytime during the 1 year validity period, it files a Shelf Prospectus Updation Document. 

This document discloses details of the specific issuance, like type of instrument, issue size, price, objects, schedule of activities, etc., while referring to the registered shelf prospectus for standard disclosures.

5. Obtaining Observations from SEBI 

Within 7 working days, SEBI issues observations on the Shelf Prospectus Updation Document.

The company needs to address SEBI’s queries and file an updated document. 

6. Opening and closing of the issue

Finally, the company announced the opening of the public issue after filing the updated Shelf Prospectus Updation Document with stock exchanges. The issue then follows standard issue processes and timelines until its closure and allotment.

The above steps enable a much faster issuance process than a normal public issue. The shelf prospectus route compresses the regulatory approval cycle from 30 days to just 7 days.

Key developments in shelf prospectus regulations

In order to allow more flexibility and wider use of shelf issuances by India Inc., SEBI has, over the years, eased various norms and requirements related to shelf filings:

Relaxed eligibility criteria

• Net worth criteria reduced from Rs 500 crore to Rs 100 crore
• The trading period shortened from 3 years to 2 years

Reduced timelines for filing

• Shelf prospectus allowed to be filed 3 months before the end of the latest audited yearly or stub period
• Earlier, this was permitted only within 3 months after the end of the period

Increased validity period

The validity of the shelf prospectus increased from 6 months to 1 year.

Institutional placement programme

Enabled QIB issuances through shelf route without filing a specific Offer Document via an Institutional Placement Programme (IPP)

Higher issue size

Maximum shelf issue size raised from Rs 250 crore earlier to Rs 750 crore now

Conclusion

The shelf prospectus mechanism has proven to be an efficient, flexible, and cost-effective route for corporations to raise capital as per their business needs in a dynamic external environment. 

Relaxation in norms by SEBI has expanded the universe of eligible companies that can strategically leverage its benefits for future fundraising and growth plans.

With fast-changing business conditions and funding needs, shelf prospectuses are becoming an increasingly popular tool in Corporate India’s strategic funding arsenal.

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