The Companies Act, 2013 introduced various innovative mechanisms that would assist in streamlining corporate operations and raising funds. One of the noteworthy features is the shelf prospectus, which would ease out multiple security issuances in the sense that eligible companies can file a prospectus for use over time. This article shall explore the meaning, types, and detailed provisions of a shelf prospectus defined under Section 31 of the Act along with an analysis of Regulation 6A under which it is filed.
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Meaning of a Prospectus
A prospectus is a kind of legal document, printed and issued by companies to invite people from the public to offer subscriptions for their securities. That helps prospective investors get detailed information about the company, its business operations, its financial health, its risks, and its plans.
Types of Prospectus
The Companies Act 2013 classifies several types of prospectuses to meet different fundraising situations:
1. General Prospectus:
A detailed paper carrying all the information relating to the provided securities in terms of pricing, terms, and the company's financial situation.
2. Red Herring Prospectus:
Used highly in the context of the IPO carries all information excluding the price of issue and number of shares proposed for sale.
3. Abridged Prospectus
It is a summarized version of the full prospectus that accompanies the application form for securities.
4. Deemed Prospectus
It relates to those situations when the company issues securities indirectly from intermediary sources that can include banks.
5. Shelf Prospectus:
It is defined as a prospectus filed to cover multiple issuances of securities within a specified period. By filing one prospectus, there is less need for separate filings in relation to each issuance of securities.
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Definition of Shelf Prospectus
A shelf prospectus, under Section 31 of the Companies Act, 2013, lets companies issue securities in amounts over a specified period without a need to file a new prospectus for every issuance. This even saves on regulatory hurdles and administrative costs.
Key Features of Shelf Prospectus
One can thus well imagine that the core features of a prospectus focus on its ability to invite public investments with financial statements and sound transparency, ensuring it helps to meet the regulatory requirements and protect investors. Such features tend to include detailed disclosures on legal safeguards while appealing to potential investors in securities to make an informed decision.
Multiple Issuances:
Companies can make subsequent offers of securities in the validity period without the necessity of filing a fresh prospectus.
Information Memorandum:
Every material change in the company's financial affairs or imposition of any charges has to be communicated through an information memorandum filed with the Registrar before making any further issues.
Cost-Effective:
The shelf prospectus results in the entire fundraising process being cost-effective, due to reduced compliance costs and administrative efforts.
Deemed Prospectus:
Every issue under the shelf prospectus, coupled with the information memorandum filed is deemed to be a prospectus.
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Section 31 in Detail
Subsection (1): Absolute Validity and Filing
Definition: Certain categories of companies notified by SEBI are also permitted to file a shelf prospectus.
Duration of Validity: The shelf prospectus is valid for a period not exceeding one year from the date of the first issuance of securities.
Subsequent Issues: Subsequent issues of securities thereafter need no other prospectus.
Subsection (2): Information Memorandum
1. Mandatory Disclosure:
A company shall file an information memorandum with the Registrar and provide such details of
Material changes in their financial position.
New issues since the last securities issue.
Other regulated modifications.
Communications with Offerors:
Where the modification has effect after offerors have lodged applications for securities, the body corporate must give the following notice
An offeror may withdraw an application and any money paid on account of securities issued or to be issued as consideration for the securities must be refunded within 15 days.
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Subsection (3): Deemed Prospectus
If a document purporting to be an information memorandum is lodged, it and the shelf prospectus is taken to be a prospectus.
Shelf Prospectus Explained
A shelf prospectus that authorizes the issuance of different types of securities within a specific time frame without requiring a new prospectus for each offer.
Detailed Breakdown of Regulation 6A
Regulation 6A prescribes the eligibility and procedural conditions for making an offer of debt securities to the public under Section 31.
Subsection (1): Eligible Entities
Only the following can submit a shelf prospectus:
Public Financial Institutions and Scheduled Banks: Entities under the Companies Act, 2013 and RBI Act, 1934.
Tax-Free Bond Issuers: Companies approved by the Central Board of Direct Taxes for issuing tax-free secured bonds.
Infrastructure Debt Funds (IDFs): Registered Non-Banking Financial Companies (NBFC) under the RBI.
Eligible NBFCs and Housing Finance Companies: Those who meet the following criteria
Minimum net worth of ₹500 crore
Profitability for three consecutive years
Credit rating at least "AA-" or similar.
No regulatory actions are pending against the company, promoters, or directors.
No default in financial obligations for the last three years.
Listed Entities:
Publicly listed for a minimum of three years.
Net worth of minimum ₹ 500 crores
Consistent distributable profit for three years
Credit rating of minimum "AA-" or its equivalent.
Subsection (2): Filing Requirements
Companies are required to file a copy of the information memorandum to SEBI and recognized stock exchanges at the time of filing with the Registrar.
Subsection (3): Information Memorandum
Must include:
Summary term sheet.
Rating changes and reason for change.
Pre- and post-issue financial ratios.
Subsection (4): Issuance Limit
A shelf prospectus permits issuances up to four times.
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Advantages of Shelf Prospectus
Shelf prospectus affords corporations several critical advantages, among which are cost savings, capital raised very speedily, flexibility in terms of multiple issuances, and certainly a lot more investor transparency through regular updates, all of which converge towards it as a streamlined, efficient tool of raising securities under quite simplified compliance procedures.
1. Process Simplification: It decreases the complexity pertaining to compliance on account of the number of issuances that can be undertaken under a single prospectus.
2. Cost Effectiveness: It saves costs that are incurred in case separate prospectuses are filed for different offerings.
3. Time Effectiveness: It accelerates the time that it takes for companies to raise funds.
4. Transparency: Regular updates of material information coming forth through an information memorandum ensure that the investors will not be deceived.
5. Flexibility: This way, companies can raise their securities at the appropriate market times.
Conclusion
The shelf prospectus concept as introduced by the Companies Act 2013 is an important step that reduces the complexity of capital market operations in India. At the same time, it minimizes compliance burdens without compromising on transparency and investor confidence by offering a shelf prospectus mechanism to eligible companies to make multiple issuances of securities under a single prospectus.
Shelf prospectus-Section 31, Regulation 6A The effectiveness and flexibility of the shelf prospectus are threaded by clear guidelines, which generate efficiency in raising capital.
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Shelf Prospectus Companies Act, 2013 FAQs
Q1: What is a shelf prospectus under the Companies Act, 2013?
Shelf Prospectus is a document that due to its eligibility to the eligible companies allows them to issue various series of securities over a specific period of time without filing a new prospectus for each issuance.
Q2: How long is a shelf prospectus valid?
A shelf prospectus is effective for a period of not more than one year commencing from the date of the first making of the offer of securities.
Q3: What is the role of an information memorandum in a shelf prospectus?
An information memorandum updates changes in the financial condition of the issuing company or other details specified to be included from time to time between successive issues made under a shelf prospectus.
Q4: Whose shelf prospectus is admissible?
Only such companies are allowed to file a shelf prospectus with the Registrar of Companies as are eligible to file a prospectus.
Public financial institutions, scheduled banks, some NBFCs, Housing Finance Companies and listed entities having fulfilled certain requirements can file a shelf prospectus.
Q5: What are the benefits of Shelf Prospectus filing for companies?
These bring down the cost of compliance, save time, and enable issuances in multiples with the component of periodical updations standing as an opacity vehicle.
