Shelf Prospectus
When a company plans to raise funds by issuing debt securities multiple times, it uses a shelf prospectus. This document allows a company to file once and issue debt securities without needing to draft a new prospectus each time.
Eligible entities for filing a shelf prospectus include:
- Public financial institutions
- Companies authorized by the Central Board of Direct Taxes to issue tax-free secured bonds
- Non-banking financial companies regulated by the Reserve Bank of India
- Listed companies with securities on the stock exchange for at least three years
To meet the eligibility criteria, a company should have:
- A net worth of at least 500 crore rupees based on the latest financial reports
- Consistent operating profits over the past three years
- A credit rating higher than "AA-" by a recognized credit rating agency
- No pending regulatory actions against the issuer or its promoters or directors
- No defaults in payment obligations for the present and past three years
The shelf prospectus must be comprehensive, clear, and avoid unverifiable forward-looking statements. It should include:
- Issuer details: name, address, logo, and contact
- Information about key personnel: compliance officer, company secretary, promoters, and CFO
- Intermediary details
- Issue specifics and credit rating
- Financial data and risk factors
- Any defaults or outstanding payments
Shelf Prospectus Validity
According to Section 31 of the Companies Act, 2013, a shelf prospectus is valid for one year from the start of the first security offer. Additional offers within this timeframe do not require a full prospectus; only a tranche prospectus with issue-specific details is needed.
Benefits of a Shelf Prospectus
The advantages of using a shelf prospectus include:
- Cost savings
- Faster fundraising due to pre-approved documents
- Reduced paperwork for subsequent issues
- Time-saving for investors who have already reviewed the prospectus
Example of a Shelf Prospectus
Consider a company aiming to raise Rs. 5,000 crores in various tranches. With eligibility confirmed, the company issues a shelf prospectus.
For example, if the draft shelf prospectus is dated March 14, 2023, and the final prospectus is issued on March 30, 2023, with the first tranche opening on April 12, 2023, the shelf prospectus remains valid until April 12, 2024. The company can issue securities up to this date without refiling the full prospectus.
For further context, review the Muthoot Finance NCD Shelf prospectus.
Tranche Prospectus
A tranche prospectus supplements the shelf prospectus by detailing specific issue information and any significant changes from previous documents.
Unlike a shelf prospectus, there is no draft version of a tranche prospectus. Once the shelf prospectus is filed, a tranche prospectus must be submitted to the stock exchange and regulatory board promptly.
Consider Indiabulls Housing Finance Limited as an example:
- On June 20, 2023, they filed a draft shelf prospectus for NCDs up to Rs 2,000 crores.
- By June 30, 2023, they filed the final shelf prospectus and Tranche I prospectus.
- Tranche I details: Rs 100 crores base issue, Rs 100 crores oversubscription, totaling Rs 200 crores.
- Tranche II filed on August 31, 2023, with similar details, bringing the total to Rs 400 crores.
- Tranche III followed on October 13, 2023, raising the cumulative limit to Rs 600 crores.
- Tranche IV on December 4, 2023, further increased the cumulative limit to Rs 800 crores.
The remaining Rs 1,200 crores can be raised by July 10, 2024, the validity end of the shelf prospectus. Post this date, a new prospectus would be necessary for additional funding.
Investors should review both the shelf and tranche prospectus for a comprehensive understanding.
Prospectus
For raising funds in a single tranche, companies typically file a draft and final prospectus, known as the DRHP and RHP, without needing a shelf prospectus. If ineligible for a shelf prospectus, companies must file anew each time they issue an NCD.
The red herring prospectus includes:
- Company details, issue structure, terms, and involved intermediaries
- Offer document front page with nature and size of the issue, opening and closing dates, stock exchanges, credit ratings, and promoter details
The offer document comprises several sections:
Definitions and Abbreviations
A comprehensive list of terms and their meanings used throughout the document.
Risk Factors
Internal and external risks investors should consider before investing.
Introduction
Includes names, logos, and contact details of key parties such as merchant bankers, debenture trustees, and legal counsel. It also outlines the capital structure, issue purpose, and use of funds.
Company and Industry Overview
Information about the company’s business, history, industry, management, and promoters.
Details on the company’s financial status, helping investors assess financial health.
Summarized offer details, issue terms, and procedures. It includes:
Issue Structure
Details on the type, seniority, nature, tranche size, minimum subscription, and credit ratings. Special terms like coupon rate and maturity date are also included.
Terms of the Issue
Information on board meeting dates, issue approval, NCD ranking, and default events. Rights and interest payment details are covered here.
Issue Procedure
Guidance on investor categories, applications, and NCD application processes.
Details of legal disclosures, outstanding litigation, and other regulatory information.
Articles of Association
Main provisions relating to share capital, transfer, voting rights, and more.
Lists material contracts and declarations, such as rating agency declarations and trustee consent letters. The document ends with annexures supporting the provided data.
