NCD Offer Document

NCD offering documents are the documents that contain all the necessary information about the issuing company and the issue to help investors make informed decisions about their investment.

Any company intending to issue NCDs to the general public must prepare the offer documents and file them with the stock exchange and SEBI for approval. As in the case of an initial public offering of shares, the NCD issuer also has to file a draft and final prospectus known as the Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP). However, in the case of NCD, we also come across terms like 'Shelf Prospectus' and 'Tranche Prospectus'. Let us understand these in detail.

1. Shelf Prospectus

A shelf prospectus is the offering document issued by a company when it intends to raise funds by issuing debt securities on multiple occasions. A company must first file a draft shelf prospectus and then the final shelf prospectus.

The following issuers are eligible to file a shelf prospectus:

• Public Financial Institutions.
• Companies are authorized to issue tax-free secured bonds to the public as per the notification of the Central Board of Direct Taxes.
• Non-banking financial companies regulated by the Reserve Bank of India.
• Listed companies whose securities are listed on the stock exchange for at least three years immediately preceding the issue, Housing Finance Company registered with the National Housing Bank or the Reserve Bank of India and meeting the following criteria:
  • Net worth of at least five hundred crore rupees as per latest financial reports.
  • Consistent operating profits for the last three years.
  • Rating of more than "AA-" or equivalent by a credit rating agency registered with the Board;
  • No pending regulatory proceedings against the issuer or its promoters or directors before the Board or the Reserve Bank of India;
  • No default in meeting any of the payment obligations in the current year and the last three financial years.

A shelf prospectus must contain all the required information and disclosures as specified in the NCS Regulations of SEBI and the Companies Act. The information in the shelf prospectus should be in simple English, relevant and up-to-date. It should not contain forward-looking statements that cannot be confirmed.

A shelf prospectus contains the key information listed below to help investors better understand the company and decide on their investment action.

• Name, address, logo, and contact details of the issuer.
• Details of the compliance officer, company secretary, promoters and chief financial officer.
• Name, address, logo and contact details of intermediaries.
• Details of the issue
• Credit rating.
• Details of the issuer.
• Financial information.
• Risk factors.
• Details of any defaults and outstanding payments

1.1. Shelf Prospectus Validity

As per Section 31 of the Companies Act, 2013, a shelf prospectus is valid for one year from the date of opening of the first offer of securities. The subsequent offer of securities can be made within the specified period of validity of the shelf prospectus without having to file the entire prospectus each time. The company has to just file a tranche prospectus containing the issue-related details.

1.2. Shelf Prospectus Benefits

A shelf prospectus is beneficial to the company and investor as listed below:

• Cost savings.
• Quick fundraising when capital is urgently needed as the approvals for shelf prospectus are already in place.
• Saving time on repetitive and time-consuming paperwork.
• Investor also saves time by going through the entire prospectus again when he wants to invest in subsequent tranches.

1.3. Shelf Prospectus Example

Let us take an example of a company that wants to raise Rs. 5,000 crores in one or more tranches. In such cases, the company will issue a shelf prospectus provided it meets the eligibility criteria for such a prospectus as mentioned above.

Let us understand the validity period of the shelf prospectus using below dates.

• Date of the Draft Shelf shelf prospectus: March 14, 2023
• Date of the Shelf Prospectus: March 30, 2023
• Date of Tranche I prospectus: March 30, 2023
• Date of opening of the Tranche I Offer: April 12, 2023

Pursuant to Section 31 of the Companies Act, the shelf prospectus will remain valid until April 12, 2024, and the issuer is not required to resubmit a full prospectus in subsequent offerings of securities to raise funds to the shelf limit until the shelf prospectus expires.

For a better understanding, please refer to the Muthoot Finance NCD Shelf Prospectus Muthoot Finance NCD Shelf prospectus.

2. Tranche Prospectus

A tranche prospectus is a supplement to the shelf prospectus that contains specific information on the issue and, where applicable, material changes to the information contained in the shelf prospectus or the earlier tranche prospectus.

There is no draft version of a tranche prospectus. Once the issuer has filed the shelf prospectus, it should promptly file a copy of the tranche prospectus with the stock exchange(s) and the Board. Thus, the date of the shelf prospectus and the tranche I prospectus are generally the same.

Let us take an example of the NCD issue of Indiabulls Housing Finance Limited:

• On June 20, 2023, Indiabulls Housing Finance filed a draft shelf prospectus for the issue of NCDs worth up to Rupees 2,000 crores (shelf limit). The company intended to raise the funds in one or more tranches.
• On June 30, 2023, the company filed the final shelf prospectus and the prospectus for Tranche I. This shows that both have the same date.Details of Tranche I Issue:
  • Base issue size: Rs 100 crores
  • Option to retain oversubscription: Rs 100 crores
  • Tranche I issue size: Rs 200 crores
  • The issue size of tranche I is within the shelf issue size of Rs 2,000 crores.
• On August 31, 2023, the Company filed the prospectus for Tranche II with the following details. Details of Tranche II Issue
  • Base issue size: Rs 100 crores
  • Option to retain oversubscription: Rs 100 crores
  • Tranche II issue size: Rs 200 crores
  • The cumulative tranche limit (I+II) is Rs 400 crores, which is within the shelf issue size of Rs 2,000 crores.
• On October 13, 2023, the company filed the prospectus for Tranche III with the following details. Details of Tranche III Issue.
  • Base issue size: Rs 100 crores
  • Option to retain oversubscription: Rs 100 crores
  • Tranche II issue size: Rs 200 crores
  • The cumulative tranche limit (I+II+III) is Rs 600 crores, which is within the shelf issue size of Rs 2,000 crores.
• On December 4, 2023, the company filed the prospectus for Tranche IV with the following details. Details of Tranche IV Issue
  • Base issue size: Rs 100 crores
  • Option to retain oversubscription: Rs 100 crores
  • Tranche II issue size: Rs 200 crores

The cumulative tranche limit (I+II+III+IV) is Rs 800 crores which is within the shelf issue size of Rs 2,000 crores.

The company can still raise the unutilised limit of Rs 1,200 crores in subsequent tranches till July 10, 2024 (within the one-year validity period of the shelf prospectus) considering that the issue of Tranche opened on July 10, 2023.

If the company wishes to raise further funds after July 2024, it will have to file a fresh shelf prospectus/prospectus depending on whether it wishes to raise funds in multiple tranches or all at once.

Refer to the NCD IPO Introduction (link to the chapter) for more details on the basic terms related to NCD IPO.

An investor should read the tranche prospectus along with the shelf prospectus.

3. Prospectus

If a company wishes to raise funds in a single tranche only, it usually files a draft and final prospectus, commonly known as DRHP and RHP, without having to file a shelf prospectus. In certain cases, the issuer may not be eligible to file a prospectus and may have to file a new prospectus every time it wishes to issue an NCD.

The red herring prospectus contains details of the company, issue structure, terms of issue and intermediaries. A prospectus generally contains the following information:

• Front Page

  The front page of the offer document shall contain the following information:

  1. The nature and issue size,
  2. Base issue size
  3. Green shoe option, if any,
  4. Overall issue size,
  5. Issue open date
  6. Issue Closure date
  7. Stock exchanges,
  8. Credit ratings, and
  9. Details of the promoters and the issuer company

  The Offer Document also contains various sections as set out below:

• Section I: Definitions and Abbreviations

  This section contains an exhaustive list of definitions and abbreviations used in the Offer Document and their meaning/full form.

• Section II: Risk Factors

  This section lists the internal and external risk factors that investors must carefully consider before making an investment decision.

• Section III: Introduction

  This section contains the name, logo, address, website URL, email address, telephone number, and contact person of:

  1. Merchant bankers and co-managers to the issue,
  2. Debenture trustee to the issue,
  3. Credit Rating Agency for the issue,
  4. Registrar to the Issue
  5. Legal Counsel,
  6. Legal Advisor,
  7. Statutory Auditors,
  8. Bankers to the Issue,
  9. Sponsor Bank,
  10. Guarantor, if applicable,
  11. Arrangers, if any.

  It also contains information on the capital structure, the purpose of the issue and the intended use of the proceeds.

• Section IV: About the company and industry

  This section contains information about the company, its business, its history and an overview of the industry. It also contains details about the company's management and promoters.

• Section V: Financial Information

  This section provides details of the company's financial results. It helps investors understand the financial status of the company.

• Section VI: Issue-related Information

  This section is divided into various parts containing summarized information on the offer, the terms and conditions of the issue and the issue procedure:

  1. Issue Structure

     Issue structure has information related to the offering as stated below:

     1. Type of instrument,
     2. Seniority,
     3. Nature of the Instrument,
     4. Tranche Issue details,
     5. Tranche Issue size,
     6. Minimum Subscription,
     7. Base Issue Size,
     8. Oversubscription Amount,
     9. Minimum Application size,
     10. Offer dates, and
     11. Credit Ratings.

     The Issue Structure section also contains the Special Terms and Conditions for NCDs, which contain important information on NCDs such as the coupon rate, effective yield, amount at maturity for NCD holders, maturity/redemption date and frequency of interest payments.

     Below is a snapshot of NCD-specific terms and conditions:

  2. Terms of the issue

     The terms of the issue contain information such as the date of the board meeting in which the issue of the NCD was approved. They also contain the key terms and conditions of the issue, the ranking of the NCDs and events of default.

     Investors will also find information on the rights of NCD holders, interest and interest payments (depending on the series), basis of interest payment and method of interest payment/release in this section.

     
  3. Issue Procedure

     This section contains information on the investor category, application form and procedure to apply for an NCD.

• Section VII: Legal and Other Information

  This section contains details of outstanding litigation, regulatory and legal disclosures and key rules and policies.

• Section VIII: Summary of Main Provisions of Articles of Association

  This section contains the main provisions of the Articles of Association relating to the definition and interpretation clause, share capital, lien, call of shares, transfer of shares, nomination and transfer of shares, forfeiture of shares, alteration of capital, joint holders, capitalization of profits, borrowing powers, buyback of shares, voting rights, proxy, board of directors, company seal, dividends and reserves.

• Section IX: Other Information

  This section lists all material contracts, agreements and declarations. This may include information such as the underwriting agreement between the ompany and the underwriter and the company's articles of association.

  The declarations may include the following information:

  • Declaration from a Rating agency and press release.
  • Debenture trustee consent letter

  At the end, the document contains various annexures to support the data provided.