The stock market creates an arena for millions of investors each day to interact and trade publicly listed stocks. Investors aim to purchase stocks in hopes that the price will go up, based on their technical and fundamental analysis, and look to sell their shares for a profit when that does happen. However, how and where does an investor get access to data about a company that is offering securities in order to carry out said technical fundamental analysis? A good percentage of this information comes from what is known as a shelf prospectus. In this article, let’s take a look at what is shelf prospectus, why it exists, and the various benefits it can offer you as an investor.
What is a shelf prospectus?
A prospectus is a document that is submitted to SEBI, that declares the intent of a company to offer securities to the public. This document contains a variety of information about the company and the securities it is offering, which can aid you as a trader to make a more informed decision vis a vis investing in those securities. A prospectus has to be submitted by a company looking to offer any type of securities to the public and is part of the initial registration process to offer stocks to be traded publicly for instance.
The benefit of a shelf prospectus is that once a company submits said prospectus, it needn’t keep having to submit a prospectus’ every time it wishes to introduce a new type of security to the market. With a shelf prospectus, companies can issue securities up to four times, before having to submit another shelf prospectus to offer more securities.
Securities and Shelf Prospectus
As mentioned earlier, a shelf prospectus is submitted when a company wishes to offer securities to trade to the public. This covers most types of securities; equity instruments such as stocks, debt instruments like bonds, and mutual funds also require a shelf prospectus to be submitted. The specificities of the shelf prospectus might vary, however, based on the type of security that is being offered. With a mutual fund, for instance, the shelf prospectus is required to have information pertinent to the fund’s goals, investment strategies, risks, bill of fees as well as distribution of earnings. With most securities, however, it is most often found that the level and type of risk is explained in the initial shelf prospectus, and elaborated upon extensively later in the application process. This breakdown of the risk involved through a shelf prospectus helps investors make a more informed decision as they have more financial data to carry out their analysis with.
As has been mentioned previously, the requirements for a shelf prospectus will vary on the details based on the type of security that is being offered. That being said, there are a number of mandatory pieces of information that companies have to provide in their shelf prospectus in order to offer securities to the general public.
The company is required to mention basic information such as the name as well as a brief background about the company and a summary of its financials. In addition to this, the company is required to mention the type of security they are offering, as well as information on whether they intend to make the offering public or private. The number of shares, for instance, are to be mentioned, alongside information including names of the company’s principals, and information about the underwriter of the security offered.
Criteria for companies
In order to be able to start the registration to offer securities by submitting a shelf prospectus, a company must first meet certain requirements. Their requirements are as follows :
- The company is required to make and submit an agreement for the dematerialization of securities, and the arrangement will have to be made with a SEBI registered depository.
- The company is required to have a net worth that is above 5,000 crores in order to be able to file its shelf prospectus.
- It must be ensured that the securities the company is issuing have a credit rating that is at least an AA- or above.
- Promoters or directors of the company should not have any regulatory action taken against them, else they don’t qualify.
- The company must be up to date on their repayment of deposits.
How is a shelf prospectus useful for an investor?
A shelf prospectus helps regulators ensure that the companies that are offering the securities are of credible stature, thus passing this credibility onto the securities they are offering. Through a series of rules, guidelines and requirements, a company can be briefly yet efficiently evaluated through a shelf prospectus. However, it also offers investors benefits. A shelf prospectus has details about the company as well as its directors and promoters, which allows investors to assess the risk that is associated with the securities that are being offered. It is also advisable that as an investor, you also study the financials of the company to assess risk better.
A prospectus is a document submitted by a company looking to offer securities for purchase with regulator SEBI, which details numerous financial information about the company and the securities they are offering. The details of a shelf prospectus will vary based on the type of security that is being offered, however, an initial prospectus provides brief information about the security and the company, while a final prospectus offers a more in-depth assessment. An added benefit of a shelf prospectus is that it has a shelf life of up to four security offerings, meaning the company needn’t file a different prospectus every time they wish to offer security. In this article, we have explored what is shelf prospectus, and how it is beneficial for investors. As an investor, it is essential to thoroughly assess securities and the company you are purchasing them from.