FRA Rules for Taskik Companies

On 22 November 2018, the Board of Directors of the Financial Regulatory Authority (“FRA”) issued decision No. 176 of 2018 with the requirements for the establishment and licensing of taskik (sukuk-issuing) companies (the “Decision”).[1] This Decision comes into effect one day following its publication in the Egyptian Gazette, which did not happen yet.

Background

Sukuks are securities issued by companies and other authorized entities in order to raise finance from those wishing to subscribe. They are different from other bonds in that they are compliant with sharia and do not represent a direct debt. Rather sukuks represent a share of specified cash flows or returns from specific assets owned by the issuing company/entity and assigned to the subscribers of these sukuks. Another distinction between sukuks and bonds is that the former are not directly issued by the company wishing to raise finance. Rather, sukuks are issued by a company called the “taskik company,” the sole purpose of which is to own the assets and rights being financed, and issue sukuks. In that, the taskik company resembles companies that issue securitization bonds. Entities that are allowed to issue sukuks through a taskik company are joint stock companies, banks, public authorities, public enterprises, and international financial institutions.

FRA New Decision: Requirements for the Establishment & Licensing of Taskik Companies

• What Taskik Companies Do

Taskik companies own assets, projects, or rights on behalf of sukuk holders. They conclude the contract according to which sukuks are issued. The company is also in charge of the credit rating of the sukuks and the management of the underlying assets for the duration of the issuance, including ensuring the regular payment of revenue. In addition, it is in charge of determining the quality of the underlying assets, projects, utilities or rights. The taskik company acts as agent on behalf of the sukuk holders, and it must be independent from the beneficiary (the company seeking financing) and their related parties in a manner that avoids any conflicts of interest.

• The Issuing Contract

The contract according to which the sukuk are issued must regulate the relationship between the company, the issuer, the sukuk holders, and the beneficiary. Its scope includes the investments, their term, sukuk dividends and tenor, potential revenues, and the manner of distribution. The contract must explicitly determine the obligations of sukuk holders, and it must restrict the disposal, by sale, mortgage, or otherwise, of the underlying assets. Ownership of the assets is returned to the beneficiary (with FRA approval) in the following events:

1. FRA not agreeing with the issuing memorandum for reasons of causing harm to the market or destabilizing it or to the interests of potential investors, or if subscription is not complete. In these events, subscribers are entitled to all of the amounts that they have paid;
2. Accelerated (early) return of sukuk;
3. Voluntary liquidation of the underlying asset (upon the approval of the sukuk holders); or
4. Final return of sukuk.

• Licensing

Companies wishing to obtain a license to establish a taskik company must take the form of a joint stock company that exclusively undertakes taskik activity. Its paid capital must not be less than EGP 10 million, and like all non-banking financial service companies of recent, corporate shareholders must represent 50% of capital, 25% of which to be owned by financial institutions. Licensed companies are listed on an FRA register. Other requirements for licensing include the following:

1. That the company has a separate location to operate this activity from and that the location is well equipped for its purpose;
2. That none of the directors on the board, or the executive managers in the company, hold a similar position at a company undertaking the same activity;
3. That none of the board members, managers, or shareholders owning 10% or more of capital had been convicted of certain crimes or declared bankrupt within the preceding five-year period of applying for the license;
4. That the board chairman and/or the CEO have the required professional qualification;
5. That the majority of board members have at least three years of experience in issuing shares and securities offerings;
6. That executive managers have at least two years of experience in the above activities; and
7. That enough staff have sufficient qualification, and the chairman of the board/CEO and department managers undergo an FRA interview.

• Taskik Company Obligations

The taskik company must keep accounting books and regular documentation that is appropriate to its activities. It must present to FRA an attestation noting that it has concluded a valid contract for the ownership of the underlying asset with the beneficiary. It must appoint an agent of payment and must refrain from re-issuing the same sukuk. A taskik company is also prohibited from merging with another unless the other company is licensed to practice the same activity and the merger is approved by FRA. In addition to the above, the company has financial statement disclosure obligations, and reporting requirements to sukuk holders and FRA. This includes disclosing any material information to sukuk holders, and submitting board minutes to FRA.   [1] FRA Board of Directors Decision No. 176/2018 on the requirements for the establishment and licensing of taskik companies, available through this link (in Arabic).