Shiva is called as Prajapati because he is a maintainer of descendants. Which gets birth form the self, that is called Praja(progeny). Entire creation is Praja of Lord Shiva. All females are expansion of Shakti and all males are expansion of Shiva. The entire civics of the universe is known as Shaivi-Praja (descendants of Shiva) and thus Shiva is known as Prajapati for being it’s master. Shiva maintains his civics through amusement, advancement, punishment and management. Brahma is also called as Prajapati. Shiva is called as Prajapati because he assumes the form of Brahma.
The reason behind the Patan (fall) of Praja (civics), is called Prajapati. Disappearance of Shiva is the cause of such downfall. Otherwise one who fell upon or entered into the civics, that is called as Prajapati. Shiva becomes Prajapati in spite of being Pashupati. According to Upanishads, Lord Shiva entered into this body in the form of life— Anena Jiven Atmana Anupravishya.
The predominating factor of the cosmos is stated as Prajapati in the Vedas. Shiva alone is adjustingly residing in all spices like Deva (celestials), Danava (demons), Yaksha (mytics), Rakshasa (monsters), Kinnar (angels), Manushya (humans), Pashu (animals), Pakshi (birds), Keet (insect), Patanga (moths) etc. According to Acharya Bhaskar the definition of word ‘Prajapati’ is given below—

अन्तरिक्षभूमिनाकसंस्थिता याः सहस्त्रशः सहस्त्रसंहिताः।
रुद्रनामिकाः प्रजाः सृजतयतः स्थाणुनामको भवान् प्रजापतिः॥

Purport: You are called as Prajapati because you create thousands of varieties of masses titled as Rudra, which stay in earth, space and heavenly planets. Shiva is also called as Prajapati because he is a particular Prajapati namely ‘Sthanu’. Jiva is a manifestation of Shiva only, developing such understanding is the true sense of worship of Prajapati.
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