Iran’s Experience in Ijarah Sukuk 4 th International Course on Islamic Capital Markets Fereshteh Rahimi Almasi Financial Expert Supervision on Primary Market Securities and Exchange Organization (SEO) May 2012
Mar 31, 2015
Iran’s Experience inIjarah Sukuk
4th International Course on Islamic Capital Markets
Fereshteh Rahimi AlmasiFinancial Expert
Supervision on Primary Market
Securities and Exchange Organization (SEO)
May 2012
Parts of the speech
Part 1: Regulations history
Part 2: The Regulations governing the activities of SPVs
Part 3: The Regulations Governing the Issue of Ijarah
Sukuk
Part 4: Operational procedure of Ijarah Sukuk issuance
Part 5: Statistics of issuance
4th International Course on Islamic Capital Markets- May 2012
Part 1:Regulations history
Regulations history
1. The Securities Market Act of Islamic Republic of Iran (November 2005)
2. The Regulations Governing the Issue of Ijarah Sukuk (January 2008) After
Sharia Board establishment in 2006
3. The Law for Development of New Financial Instruments and Institutions
(November 2009)
4. The Regulations Governing the Issue of Ijarah Sukuk (August 2010)
The Regulations Governing the activities of SPVs (August 2010)
5. Amendment of the Regulations Governing the Issue of Ijarah Sukuk (2011) and
Regulations Governing the Financial Reporting of SPVs and Originators (2012)
4th International Course on Islamic Capital Markets- May 2012
The Securities Market Act of Islamic Republic of Iran (to be continued …)
• The public offering of securities in any manner whatsoever shall be
forbidden without applying the provisions of this Act.
• Some securities shall not require registration at the discretion of
the Council.
• Registration of securities with the SEO shall not entail confirmation of
any privileges, guarantee of profitability or any recommendation and
advice.
• The securities public offering shall take place within the period of
time specified by the SEO. 4th International Course on Islamic Capital Markets- May 2012
The Securities Market Act of Islamic Republic of Iran (… continued)
• To approve new financial instruments, was set out as
one of the functions of the Council.
• To propose the utilization of new financial instruments in
the securities market, was set out as one of the functions
of SEO's board of directors;
4th International Course on Islamic Capital Markets- May 2012
The definition of Ijarah Sukuk and it’s procedure:
The procedure of approving the securities definition:
The definition of Ijarah Sukuk :
• The transferable securities which bear the name of the holder and
each certificate proves the joint ownership of its holder in the
underlying assets of Ijarah Sukuk issuance.
4th International Course on Islamic Capital Markets- May 2012
SEOSEO CouncilSharia Board
The Regulations Governing the Issue of Ijarah Sukuk (January 2008)
Not implemented, because of:
– Some executive matters
– Tax ambiguity
4th International Course on Islamic Capital Markets- May 2012
The Law for Development of New Financial Instruments and Institutions
• Permitting the SPVs establishment as one of the
financial institutions under the Securities Market Act,
• Control of the process by SEO:
– The funds raised shall be pooled in a special account and
any withdrawal from such account shall take place under
the supervision and with the approval of SEO.
• Clarifying the tax problems with tax related rules.
4th International Course on Islamic Capital Markets- May 2012
Tax related rules (to be continued …)
• Tax advantages for SPVs:
– The SPV shall be exempt from payment of any
tax
• Tax advantages for investors:
– No tax whatsoever shall be claimed for the
transfer, issuance and redemption of the
foregoing securities.4th International Course on Islamic Capital Markets- May 2012
Tax related rules (… continued)
• Tax advantages for Originators:
– The proceeds gained from selling assets to the SPV so as provide financial
resources through public offering of securities shall be exempt from tax.
– BUT, the depreciation expenses arising from assets value appreciation in
the repurchase of the same assets by the seller, in whichever manner, shall
not be regarded as parts of the tax deductable.
– The profit and fees paid or allocated for securities on the condition of
registering these securities with the SEO, shall be regarded as parts of
acceptable expenses for assessment of taxable income of such securities
issuer. 4th International Course on Islamic Capital Markets- May 2012
Part 2:The Regulations
Governing the activities of SPVs
SPV's ownership structure
4th International Course on Islamic Capital Markets- May 2012
•Others (2%)TSE (20%)•Iranian OTC
(29%)CSD (49%)
AMC (99%) •CSD (1%)
SPV
The Regulations governing the activities of SPVs (to be continued …)
4th International Course on Islamic Capital Markets- May 2012
• The “Central Assets Management Company” is
established as a private joint-stock entity for the
purposes of assets management and administering the
SPV.
• The SPV is established in the form of a “limited liability
company” by the Central Assets Management
Company.
The Regulations governing the activities of SPVs (to be continued …)
4th International Course on Islamic Capital Markets- May 2012
• All logistical services for the SPV shall be handled by the AMC.
• The SPV shall not be allowed to engage in other activities
whatsoever.
• A different SPV is specified for each issuance/project.
• The opening, closing, withdrawal and transfer of monies from
the account in which the funds derived from Sukuk issuance is
done according to the standards approved by the SEO.
The Regulations governing the activities of SPVs (… continued)
4th International Course on Islamic Capital Markets- May 2012
• The use of proceeds derived from sale of securities by the SPV for other
purposes shall be forbidden, excluding for the implementation of the
project connected with the Ijarah Sukuk issuance.
• After the issuance and use of the funds earned for the project connected
with such issues, the investing of cash flows shall be allowed solely in the
securities which shall bear the guarantee of repaying the principal
amount and its accrued interest as well as in the bank deposits.
• The SPV shall have to manage the funds available while protecting the
interests and rights of investors.
Part 3:The Regulations
Governing the Issue of Ijarah Sukuk
General Model for Ijarah Sukuk
4th International Course on Islamic Capital Markets- May 2012
OriginatorOriginator SPVSPV
3 .Sells asset
SukukholdersSukukholders
1 .Issues Sukuk
4 .Pays money 2 .Pays money
Two types of Ijarah Sukuk regarding the bodies
4th International Course on Islamic Capital Markets- May 2012
• Seller and lessee are different persons
• Seller and lessee are the same (sell and
leaseback)
Seller and lessee are different persons
4th International Course on Islamic Capital Markets- May 2012
ManufacturerManufacturer SPVSPV
3 .Sells asset
SukukholdersSukukholders
1 .Issues Sukuk
4 .Pays money 2 .Pays money
Paying agentPaying agent
7 .Paying rentals as agent of SPV
OriginatorOriginator
6 .Paying rentals
5. Asset leasing as agent of investors
Seller and lessee are the same (sell and leaseback)
4th International Course on Islamic Capital Markets- May 2012
OriginatorOriginator SPVSPV
3 .Sells asset
SukukholdersSukukholders
1 .Issues Sukuk
4 .Pays money 2 .Pays money
Paying agentPaying agent
5. Asset leasing as agent of investors
6 .Paying rentals
7 .Paying rentals as agent of SPV
Legal relationship between investors (Sukuk holders) and SPV
4th International Course on Islamic Capital Markets- May 2012
• The client-attorney relationship: Possession of Ijarah Sukuk shall be
deemed as the acceptance of the issuer's procuration and such
procuration shall remain valid and irrevocable until the final settlement
of Ijarah Sukuk.
• The SPV, on behalf of the Sukukholders, has to spend the funds derived
from sales of Ijarah Sukuk on acquiring the assets connected with the
issue and leased them to the originator.
• The holders of Ijarah Sukuk shall not be allowed to request the division
of the assets underlying the issuance of Ijarah Sukuk.
Two types of Ijarah Sukuk regarding the lease contracts
4th International Course on Islamic Capital Markets- May 2012
• Lease-purchase (lease-based possession) contract;
• Lease contracts with SPV's authority to sell assets on the
due date of rent payment at the fixed price.
Organs or bodies for Ijarah Sukuk Issuance
4th International Course on Islamic Capital Markets- May 2012
• Originator/Seller
• SPV
• Selling agent
• Underwriter
• Guarantor
• Market maker
• Paying agent (CSD)
The following agents can raise money through Ijarah Sukuk issuance:
4th International Course on Islamic Capital Markets- May 2012
• The non-governmental legal entity that:
– has been legally formed as joint-stock, cooperative,
investment fund or non-governmental public entities
except municipalities;
• The public or governmental legal entities which
include:
– The municipalities;
– The governmental institutes or companies.
The non-governmental legal entity as an originator shall meet the following requirements:
4th International Course on Islamic Capital Markets- May 2012
• Registered and active in Iran;
• the total cash flow derived from its operations must be
positive in the two recent fiscal years;
• its maximum total liabilities to assets ratio is ninety (90%)
percent;
• the opinion expressed by the company auditor concerning
the financial statements for the two recent fiscal periods
should not be "adverse" or "disclaimer“.
The guarantor shall be appointed merely from among the following entities as being acceptable to the SEO.
4th International Course on Islamic Capital Markets- May 2012
• The banks,
• Credit and financial institutions regulated by the Central Bank of I.R.I.,
• Insurance companies regulated by the central Insurance of I.R.I.,
• Investment banks,
• Investment companies,
• Public entities and the governmental institutes or companies.
The guarantor shall not be under the control of the originator and this matter shall
be confirmed by the originator's auditor.
Where the Ijarah Sukuk has a credit rating approved by the SEO, it shall not be
required to appoint a guarantor.
Assets General Specifications
4th International Course on Islamic Capital Markets- May 2012
• Utilization of the assets within the area of originator's activity shall result in cash flows
or prevent cash outflows;
• There shall not exist any legal, contractual or judicial restrictions or whatsoever on
transfer of the assets as well as the accrued interests and the rights thereupon;
• Possession and exercise of ownership rights thereof shall not impose any restriction
whatsoever on the SPV;
• There will not exist any joint ownership (except the whole ownership is transferred);
• Transfer of assets to another party will be possible;
• The assets shall, until the time of transferring the assets ownership to the issuer, have
proper and adequate insurance coverage.
Type of acceptable assets
4th International Course on Islamic Capital Markets- May 2012
• Land;
• Buildings and installations;
• Machinery and equipment;
• Means of transportation.
Assets general specifications
4th International Course on Islamic Capital Markets- May 2012
• The assets value and its economic life shall be appraised by
the experts designated by the Association of Official Experts
of the Judiciary or other reliable ways approved by the SEO.
• Assets with determined formal prices, which the SPV buys
them directly from a producer, are except from pricing again.
• The approximate assets value shall not be lower than about
4 million dollars.
The payments related to the Ijarah Sukuk shall be made in two manners
4th International Course on Islamic Capital Markets- May 2012
• Full payment of rents on the due dates until the final maturity;
• Partial payment of rents on the due dates until the final maturity
and clearance of the remainder at the final maturity.
The final profit arising from rentals management until the
final maturity shall be calculated at the maturity of Ijarah
Sukuk and paid to the holders.
Part 4:Operational procedure of
Ijarah Sukuk issuance
Operational procedure of Ijarah Sukuk issuance
4th International Course on Islamic Capital Markets- May 2012
1. The originator consults with a licensed financing advisor about the
appropriate financing method and its overall parameters.
2. The advisor hands in the necessary documents.
3. The primary permission is issued and the SPV is allotted to the Ijarah
Sukuk.
4. Necessary contracts in addition to other documents such as the
registration statement and the prospectus are handed in by the advisor.
5. The final permission of the Ijarah Sukuk issuance is given and Securities
are offered.
6. The selling contract and Ijarah contracts are signed.
1- The originator consults with a licensed financing advisor about the appropriate financing method and its overall parameters. It includes these events
4th International Course on Islamic Capital Markets- May 2012
1. The originator signs the financing and Ijarah Sukuk offering contract
with the advisor.
2. The advisor investigates the compliance of rules and regulations
about the originator, asset, contracting parties and so on.
3. The originator prepares the necessary reports to be considered by
the auditor.
4. The advisor negotiates with different parties and gets their
admission.
2-The advisor hands in the necessary documents according to rules and regulations, such as:
4th International Course on Islamic Capital Markets- May 2012
1. The financing and Ijarah Sukuk offering contract;
2. Application for primary agreement;
3. The financial feasibility study of the project to be done by money raised through Ijarah Sukuk and the auditor's
special report about it. This report shall concern the fulfillment of the conditions of the assets general specifications;
4. Originator's audited financial statements for the two recent fiscal periods;
5. The report of the originator's board of directors on the recent fiscal period;
6. The originator's articles of association;
7. The sellers agreement letter on selling the asset;
8. Asset ownership documents;
9. The report of the expert(s) on the assets value and its economic life;
10. The confirmation of State Registration for Deeds and Landed-Estate Properties;
11. Asset insurance agreements;
12. The organs agreement letter on willingness to take the responsibilities.
3-The primary permission is issued by the SEO and the SPV is allotted to the Ijarah Sukuk. At this phase the following contracts must be signed:
4th International Course on Islamic Capital Markets- May 2012
1. Commitment to sell the asset (if the seller and lessee are different
persons);
2. Commitment to lease the asset by the originator;
3. Ijaras Sukuk selling, Underwriting, Paying, Guaranteeing and Market
making contracts;
4-The following documents are submitted by the advisor:
4th International Course on Islamic Capital Markets- May 2012
1. Contracts between involved organs;
2. Application for registering the securities;
3. The registration statement and the prospectus;
4. The bank account opened considering the SEO's rights on it.
The registration statement shall, as the case may be, contain the following items:
4th International Course on Islamic Capital Markets- May 2012
1. The originator's and the securities specifications;
2. The types of lease contracts, rentals and the payment manner;
3. The report on the risk analysis associated with the originator's area
of activity;
4. The securities credit rating, if any.
The SEO's agreement:
4th International Course on Islamic Capital Markets- May 2012
1. If the information and documents are incomplete, the SEO shall,
within 30 days, reflect the matter to the issuer and request for an
amendment.
2. Where the documentation has been completed, the SEO shall,
within 30 days at the latest as of the date of filing the application,
announce its agreement or disagreement with the securities
registration to the issuer.
5-The final permission of the Ijarah Sukuk issuance is given and Securities are offered.
4th International Course on Islamic Capital Markets- May 2012
1. The underwriter will take up the securities which have not been
sold within the subscription period.
2. Within 15 days after the expiry of the public offering period, the
results of securities sales and distribution must be disclosed to the
SEO.
3. The SEO confirms the completion of the public offering process.
6-The selling contract and Ijarah contracts are signed.
4th International Course on Islamic Capital Markets- May 2012
1. The selling contract according to the confirmed format is signed.
2. Simultaneously the utilization of the funds so collected will be
authorized by the SEO.
3. Then Ijarah contract is signed according to the confirmed format.
Information disclosure of the originator, if it has not been registered with the SEO, includes the following items:
4th International Course on Islamic Capital Markets- May 2012
• The audited annual financial statements prepared according to the
Regulations Governing the Financial Reporting of SPVs and Originators;
• The important information such as:
– The events affecting the activities, financial standing and outcomes of the
originator's performance;
– The decisions and conditions influencing the capital structure and raising the
funds for the originator;
– The change in the originator's ownership structure;
– The material information affecting the securities price issued to raise the
finance.
Part 5:Statistics of issuance
Statistics of issuance
4th International Course on Islamic Capital Markets- May 2012
originator date asset
volume
(million
dollars)
rate
(percent)
life
(years)
Mahan Air co. 2010/03/11 1 Airbus airplane 28 20 4
Saman bank 2011/06/12 8 Buildings 85 20 4
Omid investment management
co.2011/08/16
3 pieces of lands (for
building)103 20 4
Mahan Air co. 2011/08/23 4 Airbus airplanes 86 20 4
Joopar Passenger & Freight
Trains Co2012/01/08
293 Passenger & Freight
Trains37 20 4
340
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