Certainly, the growth of Islamic finance has been a roaring success. In this regard, recognizing the importance of regulations in protecting investors’ interests, Securities and Exchange Commission of Pakistan (SECP) has sanctioned the regulations for issuance of Sukuks – a Shariah compliant investment instrument. The move is in line with SECP’s mandate of building up the Islamic finance market while facilitating fund raising through Shariah compliant investment avenues.
Recall that the draft regulations were initially proposed in 2012 subsequent to which stakeholders’ comments were also invited. Finally after two years of deliberation, the outcome is here. Here is a brief rundown of the regulations:
Issuance of Sukuks now requires the fulfilment of the eligibility criteria as laid down in the regulations. It doesn’t allow issuers to have any over-due loans. Besides, the minimum credit rating of the issuer as well as the instrument has been set at triple B minus (BBB-), meaning that issuers/instruments with credit rating below this level are prohibited from issuing Sukuks. This is likely to provide a level of safety about the financial soundness of the issuer. Also, for every Sukuk issue, SECP demands the appointment of a trustee and the arrangement of security to safeguard the interests of stakeholders. Also, the issuer is directed to get the go-ahead of a depository system to declare the Sukuk as eligible for the purpose of depository.
To ensure compliance with Islamic principles, the appointment of a Shariah advisory is considered mandatory who shall determine that the structure of Sukuk issue and the utilization of its proceeds adhere to the principles of Shariah. Sukuk issues shall be underwritten, except where the issue proceeds are supposed to be consumed solely for the purpose of working capital and an alternative funding arrangement is in place in case of under-subscription. In the case of this exception, the minimum subscription amount, on which the issue to be proceeded, has to be disclosed in the prospectus/information memorandum/contract where failure to meet the minimum subscription level will result in the issue being called off with the subscribers being refunded.
For every Sukuk issue, the regulations stipulate the appointment of a Trustee which shall be carried out through a trust deed containing clauses as required under the Trusts Act, 1882 and the Debt Securities Trustee Regulations, 2012. In order to bring transparency by intensifying the disclosure requirements, Sukuk issuances are to be accompanied with prospectus in the case of general public issue and with an information memorandum for issues through private placements. Disclosure requirements also include certain reporting conditions to be met by the issuer.
Also, the term sheet should at least have a minimum set of information including issuer’s name, date of issue, issue size, its mode and type, purpose of the issue, name of stock exchange incase of listing, credit rating of issuer and instrument, salient features of the issue (offer price, return, tenure), nature and amount of security backing in case of a secured issue, rates of tax and duties and contact details of the issuer, trustee and the consultants. Further, the regulation also specifies the contents of information memorandum and the list of documents to be submitted to the Commission.
SECP’s dynamism in this area is worthy of applause. Still, this is the first step and the need to amend the regulations overtime by studying international standards cannot be over-ruled.
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