FRA Further Regulates Sukuk Issuanc

Last month, the Financial Regulatory Authority (“FRA”) published its board of directors’ decision No. 50 of 2019 (the “Decision”)[1] on its website through which it regulates the issuance of sukuk by the beneficiaries of sukuk financing (the “beneficiaries”) themselves rather than through taskik companies. The Decision outlines the general prerequisites that must be met by the beneficiaries before issuing sukuk while also delving into requirements that are specific to different kinds of beneficiaries, namely joint stock companies, public authorities, public enterprises, and regional and international financial institutions. In addition to this, the Decision also addresses the regulations for listing privately placed sukuk and for the trading of sukuk outside of the stock exchange.

Sukuk Issuance by Beneficiaries

The Capital Market Law (the “CML”) outlines the different parties related to sukuk transactions, among whom are the beneficiaries and the issuing entities of sukuk (the “issuers”). The former is defined as “the legal person/corporation benefitting from financing that results from taskik (issuance of sukuk)”. As for the issuer, the CML specifies that it could either be a taskik company (an Egyptian joint stock company with the sole purpose of issuing sukuk) or the beneficiaries themselves, noting that the FRA board of directors is to set the conditions and regulations of the latter undertaking the issuance of sukuk by themselves. The CML also identifies the beneficiaries who could issue sukuk after the necessary approvals from relevant authorities, and these include banks in addition to the entities already mentioned above. In line with this, the FRA Decision sets out the general and specific requirements for beneficiaries to undertake the issuance of sukuk and the minimum and maximum issuance.

• General Prerequisites and Requirements

To issue sukuk by themselves, beneficiaries must meet certain requirements that the Decision sets out. These include the approval of the Central Sharia-Monitoring Committee (the “CSMC”) on each issuance; the financial independence of the project for which sukuk are issued (the “project”) from the issuer’s finances; the submission of the project’s plan (including strategy) and, if the sukuk are listed, quarterly disclosure reports; and last but not least, the undertaking of the issuance by an FRA-approved independent party (the “independent party”). The independent party is tasked with managing the overall issuance of the sukuk, overseeing the issuance until the end of its term, and the protection of sukuk-holder rights. This includes ensuring the timely distribution of sukuk returns and payment of their redemption value; inviting the sukuk-holders association to convene and attending their meetings and those of the issuer; monitoring violations of the prospectus or of sharia; reporting to the FRA on the availability of a suitable accounting system and maintaining documentation to manage the issuance; as well as identifying payment agents. Both the beneficiary and the independent party must also meet additional reporting requirements, including periodic financial statements and auditor reports (that follow the Egyptian Auditing Standards), periodic reports to the FRA and sukuk-holders association regarding the quality of the underlying assets, and immediate disclosure of material events. In addition, both are required to update the credit rating of the underlying asset or portfolio. The beneficiary enters into a contractual relationship with the independent party to set the rights and obligations of each. The issuing contract (according to which the sukuk are issued) must specify that the sukuk’s underlying assets, as identified by the beneficiary, are to be used for the sukuk issuance only, to the exclusion of other means of disposal. The Decision also allows the issuer’s competent body the option of giving shareholders rights issue in the sukuk.

• Requirements Specific to Joint Stock Companies

A joint stock company could issue sukuk by itself, without resorting to taskik companies, only in cases of private placement and if its founders include public entities or banks representing at least half of its capital.

• Requirements Specific to Public Authorities and Enterprises

In cases where public authorities and enterprises are the beneficiaries, both the Central Auditing Agency and an FRA-registered auditor chosen by the Ministry of Finance are to monitor the project’s accounts. In addition, if their issuance of sukuk is through a taskik company, then the capital of the taskik company must be completely publicly owned (whether by state banks or public enterprises).

• Requirements Specific to Regional and International Financial Organizations

These organizations have specific conditions and procedures to abide by in order to obtain approval for issuing sukuk in Egypt, either in local or foreign currency. Among them are the approval of the relevant body at the organization; the approval of the board of the Central Bank of Egypt; prior issuance of sukuk or debt instruments by the organization and proof of the previous sukuk’s good performance; and the independence of the project, financially and otherwise, from the organization’s other projects. Moreover, the prospectus for these organizations’ sukuk must include, among other things, general information on the issuer, the economic and social feasibility of the issuance, an elaboration on the proposed usage of the sukuk yields, and details on the sukuk themselves (including whether they could be converted to shares and the procedures to be followed in that case). Finally, these organizations can establish a risk mitigation fund, upon obtaining the FRA’s approval, that is financed at no more than 5% of the nominal value of the issuance during the term.

• Issuance Thresholds

The Decision sets the lower and upper thresholds for the sukuk values according to the kind of issuer. The overall value of the sukuk to be issued by joint stock companies, banks, and public authorities and enterprises must not be less than EGP 50 million (or their equivalent in foreign currency) and every issuance may not exceed the amount required to finance the project or activity (as per the feasibility study included in the prospectus and as approved by the relevant authority). This is increased for regional and international organizations, wherein the overall value for all sukuk to be issued by these organizations must not fall below EGP 100 million (or their equivalent in foreign currency) and must not exceed the average issuance of debt instruments by the institution during the five years prior to the request to issue sukuk.

Sukuk Listing and Trading

Finally, the Decision also addresses the listing of privately placed sukuk in one of the stock exchanges in Egypt and the regulations for trading sukuk outside of stock exchanges. In terms of the listing, the Decision amends Article (12) of the Rules for the Listing and Delisting of Securities such that it expands from the types of sukuk affected by these rules. Previously, these were limited to sukuk issued by joint stock companies and Egyptian legal persons/corporations. The new Decision expands from this category so that it includes all sukuk, including those issued by the aforementioned two in addition to other entities, slightly amending the rules accordingly to align with this expanded category. It also adds a provision requiring that sukuk be approved by both the CSMC and the internal sharia-monitoring committees before they could be listed. As for the trading of unlisted sukuk, the Decision refers to a previous FRA board of directors’ decision No. 94 of 2018 with regards to trading and proving the transfer of ownership of unlisted securities.

Conclusion

As part of the wide-ranging amendments to the CML early last year, the regulatory framework of sukuk was overhauled, replacing an older 2013 Law on the matter. Since then, the FRA has been actively involved in regulating the different aspects of the process, with decisions focusing on the workings of taskik companies and sharia-monitoring committees, both of which have been covered in previous ELU issues. The new Decision is but an additional step in the regulatory attempts at enhancing and clarifying the issuance and trading of sukuk in Egypt to meet an increasingly growing demand for investments in sharia-compliant financial instruments. After publishing the Decision on its website, the FRA announced the completion and readiness of the new framework to be implemented and that the first actual issuance of sukuk in accordance to this new framework could either take place through a taskik company or a beneficiary.[2] It thus remains to be seen how the new framework will unfurl on the ground.   [1] FRA Board of Directors Decision No. 50/2019 regulating certain provisions related to sukuk, available through this link (in Arabic). [2] Financial Regulatory Authority, “The Egyptian economy awaits the first issuance of sukuk, either by the originator or by the SPV issuer”, dated 14 April 2019, available through this link.