Resolutions of the Shariah Advisory Council of the Securities Commission Malaysia (2022) PDF

Restricted (Terhad) RESOLUTIONS OF THE SHARIAH ADVISORY COUNCIL OF THE SECURITIES COMMISSION MALAYSIA 31 December 2022 Resolutions of the Shariah Advisory Council of the Securities Commission Malaysia Resolutions of the Shariah Advisory Council ii of the Securities Commission Malaysia CONTENTS PART A 1 INTRODUCTION AND OBJECTIVES PART B 3 RESOLUTIONS OF THE SHARIAH ADVISORY COUNCIL OF THE SECURITIES COMMISSION MALAYSIA PRINCIPLES AND CONCEPTS OF MUAMALAT IN THE ISLAMIC CAPITAL MARKET 1. Ta`widh 4 2. Bai` `Inah (i) Implementation of Bai` `Inah 8 (ii) Implementation of Resolution on Bai` `Inah in Sukuk Structuring 12 3. Ibra’ 14 4. Wa`d and Muwa`adah 16 5. Tawarruq 20 6. `Aqd al-Tawrid 21 ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE 7. Nature of Shares 25 8. Crude Palm Kernel Oil Futures Contract (FPKO) 26 9. Single Stock Futures (SSFs) Contract 27 10. Islamic Business Trusts 29 11. Islamic Exchange-Traded Fund Based on Gold and Silver 31 12. Stapled Securities 34 Resolutions of the Shariah Advisory Council iii of the Securities Commission Malaysia 13. Issuance of Redeemable Convertible Unsecured Islamic Debt 35 Securities (RCUIDS) with Free detachable Warrants Based on Shariah Principle of Murabahah (via Tawarruq Arrangement) 14. Islamic Securities Selling and Buying-Negotiated Transaction (iSSB- 39 NT) Model 15. Islamic Real Estate Investment Trusts (Islamic REIT) 40 16. Shariah-Compliant Preference Shares 53 SHARIAH ISSUES IN RELATION TO THE ISLAMIC CAPITAL MARKET TYPES OF IJARAH 17. Ijarah Mudhafah Ila Mustaqbal 64 18. Ijarah Mawsufah Fi Zimmah 66 19. Ijarah Muntahiyah Bi Tamlik 68 20. Sublease 70 21. Implied Sublease 71 IJARAH ASSET 22. Asset and Usufruct as Mahal al-`Aqd in Ijarah Contract 73 23. Maintenance of Ijarah Asset 75 24. Takaful or Conventional Insurance Coverage Over the Ijarah Asset 77 25. Leasing of Ijarah Asset by the Owner to a Third Party 79 RENTAL PAYMENT IN IJARAH 26. Forms and Mechanisms of Rental Payment in Ijarah Contract 80 27. Determination of Rental Rate Based on Fixed and/or Floating Rate in 81 Sukuk Ijarah Resolutions of the Shariah Advisory Council iv of the Securities Commission Malaysia APPLICATION OF SHARIAH CONCEPT IN IJARAH 28. Application of Hamisy Jiddiyyah in Ijarah Contract 82 29. Application of `Urbun in Ijarah Contract 85 TERMINATION OF IJARAH CONTRACT 30. Issues in Relation to Termination of Ijarah Contract 86 SUKUK 31. Kafalah in Sukuk Structuring 90 32. Qalb al-Dayn in Sukuk Restructuring 97 33. Revision to Terms and Conditions Relating to Sukuk 98 34. Utilisation of Sukuk Proceeds 101 35. Utilisation of Sukuk Proceeds for Inter-Company Advances 106 36. Asset Pricing for Sukuk Issuance 108 37. Underlying Assets, Ventures and Investments in Sukuk Structuring 109 38. Form and Source of Payment for Redemption of Sukuk 111 39. Various Roles of Sukuk Issuer in Issuance of Sukuk 112 40. Waiver of Sukukholders’ Right on the Capital and/or Any Payment 113 Obligation in Additional Tier 1 Sukuk and Tier 2 Sukuk 41. Profit Rate Mechanisms in Sukuk Structuring Based on ‘Uqud 116 Mu`awadhat Apart from Sukuk Ijarah 42. Deferment of Profit Distribution to Junior Sukukholders of Sukuk 118 Structured based on`Uqud Mu`awadhat 43. Issuance of Sukuk Murabahah Before the Execution of Commodity 119 Murabahah Transaction 44. Issues Relating to Sukuk Ijarah: Ijarah Agreement and Mal Musha’ 121 Resolutions of the Shariah Advisory Council v of the Securities Commission Malaysia 45. Early Redemption Charges 123 46. Form of Structuring Sukuk Musharakah 124 47. Number of Partners in Musharakah Among Investors 126 48. Restructuring of Sukuk Musharakah: Existing Sukuk Musharakah as 127 Capital Contribution in New Sukuk Musharakah 49. Purchase and Sale Undertakings in Sukuk Structuring 129 50. Advance Part Payment When the Realised profit Rate is Less Than the 131 Expected Profit Rate (Shortfall) 51. Application of Tanazul in Sukuk Structuring 132 52. Waiver by the Sukukholders of Certain Percentage from the Nominal 134 Value of Sukuk Under the Sustainable and Responsible Investment (SRI) Sukuk Framewok 53. Shariah-Compliant Mechanism for Deferment of Expected Profit 136 Distribution in Perpetual Sukuk 54. Conversion of Sukuk and Redeemable Convertible Unsecured Islamic 139 Debt Securities (RCUIDS) into New Ordinary Shares of the Issuer 55. Investment in the Shariah-Compliant General Business Based on 142 Musha` for Sukuk Wakalah bi al-Istithmar 56. Subscription of Sukuk by way of Muqasah 143 57. Settlement of Purchase Consideration of Receivables by way of 144 Muqasah EQUITY 58. Shariah-Compliant Securities Which are Subsequently Reclassified as 146 Shariah Non-Compliant Securities 59. Unintentional Mistake of Investing in Shariah Non-Compliant Securities 148 60. Shariah Compliance for Companies That Carry Out Activities Involving 150 Manufacturing, Processing and Marketing of Food and Cosmetic Products or personal Care and Health Products 61. Giving Shariah Non-Compliant Securities By Way of Hibah 152 62. Purification of Income by Investors 155 Resolutions of the Shariah Advisory Council vi of the Securities Commission Malaysia 63. Change of Shariah Status for Securities used as Collateral for Islamic 157 Share Margin Financing 64. Application of Bai` Salam Principle in Shares Trading 158 65. Holding or Keeping Dividend in the Form of Shares to Recover Actual 160 Losses Suffered due to Disposal of Shariah Non-Compliant Shares Below the Investment Cost 66. Proceeds from the Sale of Subscription Rights of Loan Stocks to Cover 162 Technical Losses of the Company Shares STRUCTURED PRODUCT 67. Islamic Foreign Currency Option Based on Wa`d 165 68. Payment of Debt in the Investment Currency by Using the Alternate 167 Currency Based on the Currency Exchange Rate that is Determined in the Wa`d Arrangement OTHERS 69. The Application of Bai` Al-Dayn Bi Al-Sila` in the Islamic Capital Market 170 70. Bai` Wa Salaf 171 71. Ujrah on Guarantee 172 72. Collateral Assets in Islamic Capital Market Products 173 73. Forms of Capital Contribution in Musharakah and Mudharabah 176 74. Valuation of Capital Contribution In-Kind in Musharakah and 177 Mudharabah 75. Determination of Joint-Ownership Rate Over an Asset Which is 178 Physically Undivided 76. Digital Assets from Shariah Perspective 179 Resolutions of the Shariah Advisory Council vii of the Securities Commission Malaysia SHARIAH CRITERIA FOR LISTED AND UNLISTED SECURITIES LISTED SECURITIES 77. Shariah Screening Methodology for Listed Securities 183 78. Shariah Screening Methodology for Listed Securities of a Stock 186 Exchange Holding Company (SEHC) 79. Shariah Screening Methodology: Special Purpose Acquisition 188 Companies (SPAC) 80. Benchmark for Cinema Business 189 81. Removal of 20% Benchmark for Hotel and Resort Operations 190 UNLISTED SECURITIES 82. Shariah Screening Methodology for Unlisted Micro, Small and Medium 191 Enterprises (MSMEs) GLOSSARY Resolutions of the Shariah Advisory Council viii of the Securities Commission Malaysia PART A INTRODUCTION AND OBJECTIVES INTRODUCTION Islamic capital market (ICM) is currently expanding rapidly. In line with this development, various issues in relation to ICM have been discussed and resolved by the Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) through their series of meetings. As a result of this, the SC has published the SAC resolutions in relation to the concept, ICM products and the related issues for guidance and reference. However, these SAC resolutions do not include detailed Shariah clarifications and justifications. These SAC resolutions serve as an addition to the resolutions included in the Resolutions of the Securities Commission Malaysia Shariah Advisory Council (Second Edition), including updates on some existing resolutions. OBJECTIVES The objectives of this publication is to– (i) inform the public in relation to the latest SAC resolutions; and (ii) serve as guidance and reference to the public and practitioners in the Islamic finance industry in developing and expanding ICM products. Resolutions of the Shariah Advisory Council 2 of the Securities Commission Malaysia PART B RESOLUTIONS OF THE SHARIAH ADVISORY COUNCIL OF THE SECURITIES COMMISSION MALAYSIA PRINCIPLES AND CONCEPTS OF MUAMALAT IN THE ISLAMIC CAPITAL MARKET Resolutions of the Shariah Advisory Council 3 of the Securities Commission Malaysia PRINCIPLES AND CONCEPTS OF MUAMALAT IN THE ISLAMIC CAPITAL MARKET TA`WIDH INTRODUCTION In ICM, ta`widh is usually applied in the structuring of sukuk. It refers to compensation agreed by the contracting parties that can be claimed by the creditor (the financier i.e. investors/sukukholders) when the debtor (the sukuk issuer) fails or delays to perform its obligation to repay debt in relation to sukuk issuance. The SAC resolved the issue of ta`widh and updated such resolutions accordingly. RESOLUTION The SAC resolved on ta`widh in a series of meetings as follows: (1) The imposition of ta`widh on the late repayment of Islamic financing is permissible. (2) Ta`widh payment for (i) arrears and (ii) failure to pay after the due date, are both permissible. The ta`widh payment is for Islamic financing based on `uqud mu`awadhat including sukuk issued based on contracts of exchange. (3) Ta`widh imposed on a sukuk issuer who fails to meet its obligation to pay the principal amount and profit on the agreed date is permissible although the obligation arises based on `uqud ishtirak (i.e. musharakah or mudharabah contracts). In the context of `uqud ishtirak, ta`widh is limited only for failure to pay realised profit and it is not applicable for failure to pay expected profit. Resolutions of the Shariah Advisory Council 4 of the Securities Commission Malaysia (4) Ta`widh is permissible under the structure of sukuk wakalah bi al-istithmar if the sukuk issuer/wakil (agent) does the following: (i) Breaches its fiduciary duty as an investment manager due to failure in distributing the realised profit to the investors on the agreed date; or (ii) Delays the payment of any amount due and payable to the investors upon dissolution of wakalah agreement. RATE OF TA`WIDH The SAC discussed the rate of ta`widh permitted and the latest SAC resolutions are as follows: Late Payment Charge on Judgment Debt A The SAC resolved the following: (i) Late payment charge for judgment debt may be imposed by the court from the date when the judgment is made until the date when the judgment debt is settled at the rate provided by the court rules. The implementation of this late payment charge must be based on the mechanism of ta`widh and gharamah; (ii) Ta`widh refers to the compensation on the actual loss. In considering the difficulty to determine the amount of actual loss and need for standardisation in the industry, the SAC decided that the rate of actual loss shall be based on the decision made by third party i.e. Bank Negara Malaysia. The SAC also decided that the rate of actual loss shall be based on the daily overnight Islamic Interbank rate as stated in the website of Islamic Interbank Money Market (http://iimm.bnm.gov.my), fixed on the date when the judgment was made and calculated monthly based on a daily rest basis; (iii) Gharamah refers to the penalty imposed as prevention for late payment by debtor. In this context, gharamah refers to the difference between the amount of late payment charge and ta`widh i.e. the excess, if the amount Resolutions of the Shariah Advisory Council 5 of the Securities Commission Malaysia of ta`widh is less than the amount of late payment charge. The late payment charge will be determined by the court rules; (iv) The amount of late payment charge for judgment debt cannot be compounded (non-compounding); (v) Judgment creditor is entitled to receive ta`widh only. If the amount of ta`widh is equivalent or more than the amount for late payment charge, then the judgment creditor may take the whole amount of the late payment charge. However, if the amount of late payment charge is more than ta`widh, the excess (gharamah) must be channelled to charitable bodies; (vi) The amount of late payment charge shall not exceed the outstanding principal amount; and (vii) Calculation of late payment charge for judgment debt is imposed on the basic judgment sum. Basic judgment sum is the outstanding principal amount (subject to ibra’ if applicable). It shall not include late payment charge before judgment and other related costs. With regard to the administration of gharamah, the SAC decided that the mandate is to be given to the Shariah committee/Shariah adviser to determine the suitable charitable bodies including baitulmal to receive gharamah. The gharamah should be channelled by the judgment creditor1, without taking into consideration whether or not the judgment creditor is an institution under the purview of the SC. Judgment creditor will have to ensure that they will not gain any benefit howsoever and whatsoever from their action in channeling the gharamah. 1 The judgment creditor refers to a party who is entitled to the amount determined by the court (judgment sum). Resolutions of the Shariah Advisory Council 6 of the Securities Commission Malaysia B Late Payment Charge on Non-Judgment Debt The SAC resolved that ta`widh for late payment charge which may be imposed on non-judgment debt is subject to the following conditions: (i) For default payment before maturity date Ta`widh may be imposed and shall not be more than 1% per annum on the outstanding amount and shall not be compounded. In addition, gharamah may be imposed and the combined rate of ta`widh and gharamah shall not exceed 10% of the outstanding amount or as may be determined by the SAC from time to time. (ii) For default payment after maturity date Ta`widh may be imposed and shall not be more than the prevailing daily overnight Islamic Interbank Money Market rate on the outstanding balance (outstanding principal and accrued profit). In addition, gharamah may be imposed and the combined rate of ta`widh and gharamah shall not exceed 10% of the outstanding amount or as may be determined by the SAC from time to time. (iii) Treatment of ta`widh and gharamah Where ta`widh and gharamah are imposed, the investors or sukukholders are only entitled to the amount of ta`widh. The amount of gharamah shall be channelled to baitulmal and/or charitable bodies as advised by the Shariah adviser of the issuer. Resolutions of the Shariah Advisory Council 7 of the Securities Commission Malaysia PRINCIPLES AND CONCEPTS OF MUAMALAT IN THE ISLAMIC CAPITAL MARKET BAI` `INAH (i) IMPLEMENTATION OF BAI` `INAH INTRODUCTION Bai` `inah refers to sale and purchase between two contracting parties where the owner sells the asset to the buyer on cash basis and then buys back the asset at a deferred price which is higher than the cash sale. It may also be conducted where the owner sells the asset to the buyer at a deferred sale price and subsequently buys back the asset on cash basis at a lower price than the deferred sale. The resolution on the permissibility of bai` `inah was made by the SAC. Since the issue of bai` `inah involves differences of opinions among classical and contemporary scholars, the SAC discussed this at numerous meetings to update the resolution regarding the implementation of bai` `inah which is permissible by Shariah. RESOLUTION The SAC resolved that bai` `inah is a principle which is permissible in the ICM in Malaysia. However, the SAC updated its resolution on bai` `inah and resolved that the implementation of bai` `inah shall conform to and comply with the following conditions: Resolutions of the Shariah Advisory Council 8 of the Securities Commission Malaysia A The sale and purchase of asset shall be executed via two clear and separate contracts The following requirements shall be complied with: (i) Both contracts shall comply with the general requirements for valid sale and purchase in accordance with Shariah; (ii) Transaction documents for sale or purchase of asset may be done via documentation method which is accepted by market practice (`urf) including via written documentation or verbal recording; and (iii) Transaction documents for both sale and purchase of asset in the written form shall be prepared in two separate sets of documents. B The sale and purchase of asset shall not have the conditions for repurchase or resale of asset Any form of conditions for repurchase or resale of asset associated with bai` `inah contract will annul the contract. The following requirements shall be complied accordingly: (i) For the purpose of the resolution, conditions for repurchase or resale of asset comprises: (a) Any statement in any documents in relation to the bai` `inah transaction which clearly states that the seller or the purchaser will repurchase or resell asset; and/or (b) Any statement in any documents in relation to the bai` `inah transaction which provides the sequence of transaction regarding the sale of asset between two parties followed by the purchase of the same asset between the same parties or vice versa. Resolutions of the Shariah Advisory Council 9 of the Securities Commission Malaysia (ii) The conditions for repurchase or resale of asset shall not be stipulated in any documents in relation to the bai` `inah transaction as it will annul the transaction. All documents related to bai` `inah transactions are considered as elements that form the contract where all those documents are inter-related and shall not be separated from one another. Thus, the conditions for repurchase or resale of asset shall not be included in any documents relating to such bai` `inah transaction, for instance in sukuk issuance, such conditions shall not be included in the Principal Terms and Conditions, Details of the Sukuk Facility, Trust Deed, Information Memorandum, Master Agreement and other related documents. The SAC also resolved that the practice of pre-signing1 of legal documents for bai` `inah transaction is not allowed. This practice is perceived as a form of condition for the repurchase or resale of asset in bai` `inah transaction which is not permissible. C Both sale and purchase contracts shall be executed at different times The execution of both sale and purchase contracts carried out simultaneously by the contracting parties shall annul both transactions. Hence, the sale and purchase contracts shall be executed at different times. D Sequence of execution for each sale and purchase contract shall be based on proper sequence The sequence of execution for each sale and purchase contract shall be executed properly whereby the first sale contract shall be completely concluded before the second sale contract is executed. 1 Pre-signing refers to signing of the sale or purchase of asset by either party to the contract in the first sale and purchase contract, followed by the signing of the repurchase or resale of asset by the same parties in the second sale and purchase contract, before the first contract is being executed by another party (counterparty). Resolutions of the Shariah Advisory Council 10 of the Securities Commission Malaysia Therefore, the following requirements shall be fulfilled: (i) For the sale or purchase of asset, the selling party shall sign the agreement first followed by the purchasing party; (ii) Similarly, for the subsequent sale or purchase transaction, the selling party shall sign the agreement first followed by the purchasing party; and (iii) Any contracting parties shall not provide any verbal or written promise to resell or repurchase the said asset. E The sale and purchase of asset shall give effect to the transfer of ownership of asset and the existence of possession or holding of asset (qabdh) which is valid according to Shariah and customary business practice (`urf tijari) The following requirements shall be observed: (i) The possession or holding of asset (qabdh) can occur either physically (al- qabdh al-haqiqi) or constructively (al-qabdh al-hukmi); and (ii) Such possession or holding of asset (qabdh) shall give the following effects: (a) Takhliyah which means denying the right of the seller in respect of the sold asset; and (b) Tamkin which means creating complete right of the purchaser in respect of the purchased asset. Resolutions of the Shariah Advisory Council 11 of the Securities Commission Malaysia (ii) IMPLEMENTATION OF RESOLUTION ON BAI` `INAH IN SUKUK STRUCTURING INTRODUCTION Pursuant to the SAC resolution pertaining to the implementation of bai` `inah above which took effect on 1 October 2014 (New Bai` `Inah Resolution), a question arises whether such resolution is applicable in the following two situations: (i) Revision to the terms of sukuk which was issued based on previous resolution on bai` `inah1 (Previous Bai` `Inah Resolution); and (ii) Upsizing the limit of an existing sukuk programme. RESOLUTION The SAC had resolved that the implementation of the New Bai` `Inah Resolution is as follows: (i) For sukuk proposal submitted on or after 1 October 2014, the New Bai` `Inah Resolution shall be applicable; (ii) For revision to the terms of sukuk which was issued based on the Previous Bai` `Inah Resolution and the revision is not considered as a new submission pursuant to the requirements under the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework and the Guidelines on Issuance of Private Debt Securities and Sukuk to Retail Investors, the New Bai` `Inah Resolution shall not be applicable; and (iii) For upsizing the limit of an existing sukuk programme which was issued based on the Previous Bai` `Inah Resolution, the following requirements are applicable: 1 The previous SAC resolution in relation to the permissibility of bai` `inah in Islamic capital market was made in general term and did not address in detail on its implementation. Resolutions of the Shariah Advisory Council 12 of the Securities Commission Malaysia (a) If there is provision for upsizing in the Principal Terms and Conditions (PTC) or the Details of the Sukuk Facility, the New Bai` `Inah Resolution shall not be applicable even though the proposal for upsizing is considered as a new submission pursuant to the requirements under the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework and the Guidelines on Issuance of Private Debt Securities and Sukuk to Retail Investors; and (b) If there is no provision for upsizing of the sukuk programme limit in the PTC or the Details of the Sukuk Facility, the New Bai` `Inah Resolution shall be applicable to the proposal for upsizing of the sukuk programme. Resolutions of the Shariah Advisory Council 13 of the Securities Commission Malaysia PRINCIPLES AND CONCEPTS OF MUAMALAT IN THE ISLAMIC CAPITAL MARKET IBRA’ IBRA’ INTRODUCTION The SAC passed a resolution on ibra’ in ICM transactions. However, the SAC has updated the resolution on ibra’ to clarify on the application and scope of ibra’ in ICM. RESOLUTION The SAC in a series of its meetings discussed in relation to the application of ibra’ and its scope in the ICM. The SAC had resolved to update the resolution on ibra’ comprising the scope and definition of ibra’ and its application in ICM transactions as follows: 1 Definition of Ibra’ Ibra’ refers to an act of releasing absolutely or conditionally one’s rights and claims on any obligation against another party which would result in the latter being discharged of his/its obligation or liabilities towards the former. The release may be either partially or in full. 2 The Application of Ibra’ Ibra’ may be applied in `uqud mu`awadhat including: (a) Murabahah and Musawamah Ibra’ refers to release of rights on debts or amount due and payable under the said contract. (b) Ijarah Ibra’ refers to release of rights on accrued rental. Resolutions of the Shariah Advisory Council 14 of the Securities Commission Malaysia 3 Scope of Ibra’ In ICM transactions, ibra’ may be applied in the following situations: (a) Early redemption (i) Sukukholders may offer ibra’ to the issuer based on the application made by the issuer for early redemption of sukuk upon occurrence of any event of default, call option, regulatory redemption, tax redemption, etc. (ii) The formula for the computation of early settlement may be stated as a guide to the issuer. (iii) The ibra’ clause and the formula for the computation of early settlement may be stated in the main agreement of sukuk which is based on `uqud mu`awadhat. However, the ibra’ clause in the main agreement shall be separated from the part related to the price of the transacted asset. The ibra’ clause shall only be stated under the section for mode of payment or settlement in the said agreement. (b) Other event(s) Sukukholders may offer ibra’ to the issuer in specific event(s) that requires them to release their rights and claims on any obligation, for example in the event of a write-off at the point of non-viability for Tier 2 sukuk based on Shariah principle of murabahah.1 1 For more details on this issue, please refer to the SAC resolution on “Waiver of Sukukholders’ Right on the Capital and/or Any Payment Obligation in Additional Tier 1 Sukuk and Tier 2 Sukuk”. Resolutions of the Shariah Advisory Council 15 of the Securities Commission Malaysia PRINCIPLES AND CONCEPTS OF MUAMALAT IN THE ISLAMIC CAPITAL MARKET WA`D AND MUWA`ADAH INTRODUCTION The principles of wa`d and muwa`adah were discussed in a series of SAC meetings to seek its decision. Among the issues discussed on the aforementioned principles were: (i) Definition of wa`d; (ii) Binding effect of wa`d; (iii) Permissibility of wa`d mulzim; (iv) Implication of breach of wa`d; (v) Definition of muwa`adah; (vi) Binding effect of muwa`adah; (vii) Permissibility of muwa`adah mulzimah; and (viii) Implication of breach of muwa`adah. RESOLUTION The SAC had resolved on wa`d and muwa`adah as follows: 1 PRINCIPLE OF WA`D (i) Definition of Wa`d Wa`d is a promise by a person or a party to perform certain task in the future. Resolutions of the Shariah Advisory Council 16 of the Securities Commission Malaysia (ii) Binding Effect of Wa`d Wa`d is mulzim (unilaterally binding) on the promisor if the wa`d is attached to any of the following: (a) A particular action which is done by a party including the promisee in the future; (b) A particular time or date; or (c) A particular situation which will occur in the future. The bindingness of wa`d shall take effect at the time when the wa`d is expressed. (iii) Permissibility of Wa`d Mulzim Wa`d mulzim is permissible based on the view of fuqaha’ that wa`d which is attached to conditions is binding. The types of conditions include a particular action, date/time and situation. This ruling may clarify the types and categories of conditions attached to wa`d that lead to the binding effect of wa`d, especially in the financial instruments that involve promise to enter into contract that is attached to a particular date/time in the future. (iv) Implication of Breach of Wa`d The promisor who breaches his wa`d is liable to pay ta`widh based on actual loss suffered (if any) by the aggrieved promisee due to the breach of the wa`d. Resolutions of the Shariah Advisory Council 17 of the Securities Commission Malaysia 2 PRINCIPLE OF MUWA`ADAH (i) Definition of Muwa`adah Muwa`adah is a bilateral promise between two persons or two parties to enter into a contract in the future. (ii) Binding Effect of Muwa`adah Muwa`adah is mulzimah (bilaterally binding) on the promisors if the muwa`adah is attached to any of the following: (a) A particular action which is done by a party including the promisee in the future; (b) A particular time or date; or (c) A particular situation which will occur in the future. The bindingness of muwa`adah shall take effect at the time when the muwa`adah is expressed. (iii) Permissibility of Muwa`adah Mulzimah Muwa`adah mulzimah is permissible because muwa`adah is merely a promise and does not tantamount to a contract. Since the contract is yet to be entered into, it does not have the effect of a contract. For example, when muwa`adah is expressed in relation to sale and purchase contract, there is no requirement on the delivery of the counter values between the respective promisors because the contract will only be entered into at a time which have been agreed in the future in the muwa`adah arrangement. Resolutions of the Shariah Advisory Council 18 of the Securities Commission Malaysia (iv) Implication of breach of Muwa`adah The promisor who breaches his promise in the muwa`adah is liable to pay ta`widh based on the actual loss suffered (if any) by the aggrieved promisee due to the breach of the promise. Resolutions of the Shariah Advisory Council 19 of the Securities Commission Malaysia PRINCIPLES AND CONCEPTS OF MUAMALAT IN THE ISLAMIC CAPITAL MARKET TAWARRUQ INTRODUCTION Tawarruq refers to purchasing a commodity or asset on deferred price and subsequently selling it to a third party at a lower price than the purchase price on cash basis. This mechanism is an alternative to avoid from dealing with riba via an interest-bearing loan. Hence, this issue has been discussed with the SAC whether Shariah allows tawarruq to be applied in Islamic capital market or not. RESOLUTION The SAC had resolved that tawarruq is permissible to be applied in Islamic capital market. Resolutions of the Shariah Advisory Council 20 of the Securities Commission Malaysia PRINCIPLES AND CONCEPTS OF MUAMALAT IN THE ISLAMIC CAPITAL MARKET `AQD AL-TAWRID INTRODUCTION `Aqd al-tawrid is a modern trade contract that is widely discussed by contemporary scholars nowadays. It is one of the transaction contracts which is available and has become a hajah nowadays due to the rapid development of the current economic and trade sectors. RESOLUTION SAC had resolved that `aqd al-tawrid is permissible. The SAC resolutions on `aqd al- tawrid are as follows: 1 DEFINITION OF `AQD AL-TAWRID `Aqd al-tawrid is a contract between customer/purchaser and supplier/seller for supply of goods or services where its features have been specified to be delivered to the customer/purchaser on certain period of time and at certain payment of price as agreed by the contracting parties. There are various forms of `aqd al-tawrid based on the need and agreement of the contracting parties. Usually the delivery and payment of goods or services will be made either upon execution of contract or at the end of the contract period either in lump sum or on instalment basis according to the stage of the delivery of goods, services or payment made respectively. Resolutions of the Shariah Advisory Council 21 of the Securities Commission Malaysia 2 TA’JIL AL-BADALAIN IN `AQD AL-TAWRID Ta’jil al-badalain1 is permissible in `aqd al-tawrid subject to the following conditions: (i) There are specific terms in the contract on the period/date of delivery of goods or provision of services and payment of the price that have to be carried out on the specified time in the future. (ii) It shall be stated specifically in the contract in relation to the types, features, rates, period, price and place of delivery of goods or provision of services on the specified time. 3 GUARANTEE OF PAYMENT BY CUSTOMER Guarantee of payment by customer/purchaser is permissible if the guarantee is Shariah-compliant based on kafalah principle. If guarantee based on kafalah principle cannot be procured from Islamic banks or kafalah provider, then conventional guarantee is allowed. 4 DELAY OR DEFAULT IN THE PAYMENT OF PRICE ON AGREED DATE In the event of delay or default in the payment of price by customer/purchaser on the mutually agreed date, the supplier/seller is allowed to impose ta`widh on the customer/purchaser based on actual loss incurred either for late payment charge on non-judgement debt or late payment charge on judgement debt. The ta`widh charge can be recognised as income by the supplier/seller. 5 DELAY OR FAILURE IN DELIVERY OF GOODS OR SERVICES ON THE AGREED DATE In the event of delay or failure in delivery of goods or services by the supplier/seller on the mutually agreed date, both contracting parties (i.e. the supplier/seller and 1 Delivery of goods or preparation of services and the payment of the price are deferred to a future time. Resolutions of the Shariah Advisory Council 22 of the Securities Commission Malaysia the customer/purchaser) may agree to include a clause to impose a charge for delay or failure in delivery of goods or services (syart jaza’i) either: (i) upon the execution of `aqd al-tawrid; or (ii) throughout the contract provided that there has not been any delay or failure in delivery of goods or services by the supplier/seller on the mutually agreed date. Both contracting parties must fulfill all conditions that have been agreed in syart jaza’i as long as the conditions set do not contradict with Shariah. The charge that could be imposed on the supplier/seller is subject to the agreement of both contracting parties and it is not subject to the actual loss borne by the customer/purchaser. The charge can be recognised as income by the customer/purchaser. Resolutions of the Shariah Advisory Council 23 of the Securities Commission Malaysia PART B RESOLUTIONS OF THE SHARIAH ADVISORY COUNCIL OF THE SECURITIES COMMISSION MALAYSIA ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE Resolutions of the Shariah Advisory Council 24 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS NATURE OF SHARES FROM SHARIAH PERSPECTIVE NATURE HAKIKATOF SHARES SAHAM INTRODUCTION Shares are units of ownership interest of the shareholders in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are ordinary shares and preferences shares. Since shares are part of the capital market instruments, the SAC had discussed on it to determine the status or nature of shares from the perspective of asset category in Shariah whether it resembles currency, debt, `ayn of the company or an asset in its own category. RESOLUTION The SAC resolved that shares are asset which can be categorised as mal mithli1 that represent the right of ownership of the shareholders in the company. Shares do not resemble currency, debt and `ayn of the company. 1 Mal mithli refers to something that is easy to obtain in the market and is similar in physical form. Even if there are any differences, they are not too obvious and normally people do not take into consideration on those particular differences. Resolutions of the Shariah Advisory Council 25 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE CRUDE PALM KERNEL OIL FUTURES CONTRACT (FPKO) INTRODUCTION Commodity futures contract refers to an agreement to buy or to sell commodity which has been fixed at a specified price and on specified date in the future. In Malaysia, among the commodity futures contracts which are traded in the market are Crude Palm Oil Futures (FCPO) and Crude Palm Kernel Oil Futures (FPKO). The SAC had resolved that FCPO contract is one of the products that is Shariah- compliant. However, FPKO contract requires the determination of its Shariah-complaint status whether it is permitted by Shariah or not. RESOLUTION The SAC had resolved that FPKO contract is permissible because it complies with Shariah principles. Resolutions of the Shariah Advisory Council 26 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS KONTRAK NIAGA HADAPAN STOK TUNGGAL FROM SHARIAH PERSPECTIVE (SINGLESTOCK SINGLE STOCKFUTURES FUTURES(SSFs) CONTRACT) CONTRACT INTRODUCTION Single Stock Futures (SSFs) contract refers to future contract on selected individual stocks which are listed on Bursa Malaysia. Among the features of SSFs are as follows: (i) Standardised contract SSFs have a standard specification of contract as determined by Bursa Malaysia. (ii) Exchange Traded SSFs are traded and cleared on Bursa Malaysia. (iii) Standard quantity for specific underlying asset Each SSFs is equivalent to 1,000 units of shares of the underlying asset. (iv) Expiry date of futures contract is predetermined earlier SSFs expire on the last day of transaction on the contract month and are cash settled. When a person buys or sells an SSFs contract, it is equivalent to buying or selling 1,000 units of shares that become the underlying asset for the said contract. The price of the SSFs contract for delivery or final settlement in the future when it reach the maturity date is based on mutual agreement by both parties upon purchasing or selling the SSFs contract. However, a person may close the SSFs contract which was bought or sold at any time before the contract matures. Since the SSFs contract is one of the instruments that are traded on Bursa Malaysia, therefore this matter was presented to the SAC for decision on whether SSFs contract is permissible or not.. Resolutions of the Shariah Advisory Council 27 of the Securities Commission Malaysia RESOLUTION The SAC resolved that SSFs contract is in line with Shariah subject to the following conditions: (i) The underlying assets for the SSFs contract are Shariah-compliant shares as approved by the SAC. (ii) Investors are given the option to make a final settlement for the SSFs contract either through cash settlement or physical delivery of the underlying assets.. Resolutions of the Shariah Advisory Council 28 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE ISLAMIC BUSINESS TRUST INTRODUCTION Business trust is a unit trust scheme where the operation or management of the scheme and property scheme or asset are managed by a manager as a trustee. A business trust has specific features whereby among these features are as follows: (i) There is no restriction on the type of assets which a business trust may hold. The activities undertaken may be in respect of any property or asset and the investment mandate is usually narrow or focused; (ii) The property or asset is managed as a whole by a trustee-manager or by another person on behalf of the trustee-manager; (iii) There is no capital maintenance requirements; and (iv) There is no restriction to pay dividends out of accounting profits. The business trusts can pay distribution to investors out of operating cash flows, subject to solvency test. Shariah requirements for the Islamic business trust were provided in the Business Trusts Guidelines. The provision in the Business Trust Guidelines was a result from the discussion with the SAC. Hence, the SAC had resolved certain Shariah requirements relating to Islamic business trust. Resolutions of the Shariah Advisory Council 29 of the Securities Commission Malaysia RESOLUTION The SAC discussed issues relating to the Islamic business trust in a series of meetings. The SAC resolved that the requirements for the Islamic business trust are as follows: (i) It must be structured based on the approved Shariah principles and concepts or other Shariah principles and concepts approved by the SAC from time to time; (ii) At least three individual Shariah advisers must be appointed to form a Shariah Committee; (iii) The businesses or assets must be Shariah-compliant as determined by the Shariah adviser; (iv) The Shariah adviser may employ the SAC’s Shariah screening methodology in determining the Shariah-compliant status of business activities; (v) The Shariah adviser must ensure that all forms of investment, deposit and financing instruments comply with Shariah principles and requirements; and (vi) Where the Islamic business trust intends to insure its assets or properties, it must procure the takaful scheme. If the takaful scheme is unable to provide the required and/or sufficient coverage, the Islamic business trust may procure conventional insurance scheme to ensure sufficient coverage of the same. Resolutions of the Shariah Advisory Council 30 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE ISLAMIC EXCHANGE-TRADED FUND BASED ON GOLD AND BASED SILVER ON GOLD AND SILVER INTRODUCTION Islamic exchange-traded fund based on gold and silver (Islamic ETF Gold and Silver) is an ETF which uses gold and silver (such as gold and silver bullions/bars) as the underlying asset. The Islamic ETF Gold and Silver units represent the unitholders’ undivided ownership of the gold and silver on a pro-rata basis. The gold and silver will be held by the custodian during the tenure of the fund. Since this product involves ribawi item i.e. gold and silver as underlying asset, hence it was presented and discussed in the SAC meeting to seek their opinion on this matter. RESOLUTION The SAC, in a series of its meetings, discussed the issues relating to the Islamic ETF Gold and Silver. The SAC resolved that gold and silver (such as gold and silver bullions/bars) may be used as underlying asset for Islamic ETF. The SAC also resolved that the concept of Islamic ETF based on gold and silver are acceptable by Syara` and it is Shariah-compliant subject to the following conditions: CONDITIONS FOR ESTABLISHMENT, STRUCTURING AND TRADING OF ISLAMIC ETF BASED ON GOLD AND SILVER AS THE UNDERLYING ASSET (i) The Islamic ETF units represent an equivalent amount of physical gold and silver held by the custodian on behalf of the Islamic ETF. Hence, the Islamic ETF units represent the unitholders’ ownership of the gold and silver on a pro-rata basis. The creation and redemption of the Islamic ETF units must be backed by physical gold and silver with specified quantity and quality. Therefore, at the inception and Resolutions of the Shariah Advisory Council 31 of the Securities Commission Malaysia creation of the Islamic ETF units, the fund manager and Shariah adviser of the Islamic ETF Gold and Silver must verify that: (a) The gold and silver, with the correct quantity and quality as per the specification, are in existence; (b) The gold and silver which forms the underlying assets for the creation of the Islamic ETF units are allocated and segregated; and (c) The gold and silver can be delivered to the unitholders when they redeem the Islamic ETF units. (ii) The trading of the Islamic ETF units between the buyer and the seller must be carried out in cash and on spot basis1. (iii) Since the trading of the Islamic ETF must be carried out on cash basis, the Islamic ETF units can only be traded if the buyers have cash accounts or margin facility (via third-party financing). (iv) The Shariah adviser of the Islamic ETF must provide detailed reasoning on the Shariah compliance of the Islamic ETF in the Shariah pronouncement on the following: (a) Structure, creation and redemption of the Islamic ETF units; and (b) Trading of the Islamic ETF units in the secondary market. (v) The Shariah adviser of the Islamic ETF must conduct an annual audit (including a site visit to the place where the gold and silver are kept) to confirm its existence, quantity and other details such as record of its movement. This is to ensure that 1 The current trading and settlement system of the stock exchange supports the spot transaction, even though settlement is only made on T+2 day. At the broker level, once an order is executed (T-day), the amount of money in the buyer’s account will be transferred out for the payment to the seller and consequently the buyer no longer has rights to that amount of money. Thereafter, the number of units or shares will be transferred into the buyer’s account. On T-day, the buyer has full ownership, resulting in him having all rights and liabilities pertaining to the units or shares. From the Shariah perspective, this constitutes constructive possession. Resolutions of the Shariah Advisory Council 32 of the Securities Commission Malaysia the Islamic ETF units created are backed by the actual gold and silver kept in the vault in a segregated and allocated manner. (vi) The Shariah adviser of the Islamic ETF must also prepare a report on the annual audit, to be included in the Shariah adviser’s compliance report to the unitholders. (vii) The unitholders are entitled to redeem the Islamic ETF units in physical gold and silver or its equivalent in cash. Resolutions of the Shariah Advisory Council 33 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE STAPLED STAPLEDSECURITIES SECURITIES INTRODUCTION Stapled securities refers to a situation where investors own two or more securities which are generally related to each other and contractually bound together through a single vehicle that cannot be traded separately. For example, shares of listed companies attached to the real estate investment trust (REIT) thus, becomes a new product. In relation to stapled securities, a proposal from the industry has been presented to the SAC involving shares of a company that are classified as Shariah-compliant securities by the SAC. The shares are stapled with the units of Islamic real estate investment trust (Islamic REIT) and listed on Bursa Malaysia as “stapled securities” replacing the existing shares of the company. RESOLUTION The SAC resolved that in general, for any stapled securities to be classified as Shariah- compliant, each of the securities stapled must be Shariah-compliant. Resolutions of the Shariah Advisory Council 34 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE ISSUANCE OF REDEEMABLE CONVERTIBLE UNSECURED ISLAMIC DEBT SECURITIES (RCUIDS) WITH FREE DETACHABLE WARRANTS BASED ON SHARIAH PRINCIPLE OF MURABAHAH (VIA TAWARRUQ ARRANGEMENT) INTRODUCTION The SAC deliberated on a proposed issuance of redeemable convertible unsecured Islamic debt securities (RCUIDS), together with free detachable warrants by a company listed on Bursa Malaysia, based on the Shariah principle of murabahah (via tawarruq arrangement). DEFINITION OF RCUIDS RCUIDS is a type of Islamic debt securities which is an alternative to its counterpart of conventional loan stocks. Basically, RCUIDS is redeemable, convertible and unsecured securities issued by a company in exchange for the financing by the investors. RCUIDS is also a type of fixed income securities. The RCUIDS holders are deemed as the company’s creditors rather than shareholders. Apart from that, the RCUIDS holders do not have any rights over the company other than rights to the repayment of the financing and the fixed profit according to the terms of issuance. PURPOSE OF ISSUANCE RCUIDS is issued as an alternative to obtain funding at a lower rate than a normal financing offered by banks or other financial institutions. The feature of RCUIDS which is convertible to mother shares of the company is intended to attract subscription by the existing shareholders. Apart from that, it is also an investment opportunity for the existing shareholders to gain better returns than a bank’s fixed deposit. Resolutions of the Shariah Advisory Council 35 of the Securities Commission Malaysia FEATURES OF RCUIDS Among the features of RCUIDS are as the follows: (1) Redeemable: It ensures that the company will fulfill its repayment obligation to the investors on the maturity date. (2) Convertible: It gives the rights to the investors to convert RCUIDS to ordinary shares of the issuing company. (3) Unsecured: This means that even if the investors are entitiled to the payment of the fixed profit rate, they have no rights to the company’s assets in the event that the company defaulted or goes into liquidation. In relation to the proposed RCUIDS, there were few issues presented to the SAC for deliberation. These issues in deliberation were the following: (1) The status of the RCUIDS and warrants in the event of reclassification of the Shariah status of the issuer’s securities from Shariah-compliant to Shariah non- compliant by the SAC, during the tenure of the RCUIDS; and (2) The options available for the RCUIDS holders in the event of the Shariah status reclassification of the issuer’s securities from Shariah-compliant to Shariah non- compliant by the SAC, during the tenure of the RCUIDS. RESOLUTION S The SAC had resolved the following: 1 In the event the RCUIDS has been issued and no conversion has been made If the RCUIDS has yet to be converted into new shares of the issuer and the issuer’s securities has been reclassified from Shariah-compliant to Shariah non- compliant by the SAC, the RCUIDS holders have the rights to do the following: Resolutions of the Shariah Advisory Council 36 of the Securities Commission Malaysia (i) The RCUIDS holders have the discretion to convert the RCUIDS into new shares of the issuer. In the event the RCUIDS is converted into new shares of the issuer, then the guidance on timing for disposal of Shariah non-compliant securities as provided in the List of Shariah-Compliant Securities by the Shariah Advisory Council of the Securities Commission Malaysia (Guidance on Disposal of Shariah Non-Compliant Securities) may be applicable; (ii) The RCUIDS holders may sell the RCUIDS to third parties; or (iii) The RCUIDS holders may require the issuer to redeem the RCUIDS in cash based on a formula to be agreed between the issuer and the RCUIDS holders. 2 In the event that the RCUIDS has been issued and converted into new shares of the issuer If the RCUIDS has been converted into new shares of the issuer and the issuer’s securities have been reclassified from Shariah-compliant to Shariah non- compliant by the SAC, the Guidance on Disposal of Shariah Non-Compliant Securities may be applicable. 3 Warrants If the warrants have not been exercised and the issuer’s securities have been reclassified from Shariah-compliant to Shariah non-compliant, the Guidance on Disposal of Shariah Non-Compliant Securities may be applicable. The above requirements must be disclosed in the disclosure documents pertaining to the issuance of the RCUIDS and the Shariah pronouncement. Resolutions of the Shariah Advisory Council 37 of the Securities Commission Malaysia The SAC further resolved that the above resolution is also applicable for any redeemable convertible secured instruments proposals which have similar convertibility features and structured based on the Shariah principle of murabahah (via tawarruq arrangement). Resolutions of the Shariah Advisory Council 38 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE ISLAMIC SECURITIES SELLING AND BUYING- NEGOTIATED TRANSACTION (iSSB-NT) MODEL INTRODUCTION Islamic Securities Selling and Buying-Negotiated Transaction (iSSB-NT) Model is an alternative Shariah-compliant model to the conventional Securities Borrowing and Lending-Negotiated Transaction (SBL-NT) Model1. The iSSB-NT Model is developed to address the needs to further grow the Shariah-compliant securities market in particular the Islamic exchange traded fund. Among the issues in deliberation were on the permissibility of the proposed iSSB-NT Model which is structured based on two outright bai` transactions that includes the feature of wa`dan, khiyar al-shart2 and the provision of collateral as security for the indebtedness. RESOLUTION The SAC resolved that the proposed iSSB-NT Model is permissible. 1 SBL is a term used to describe a transaction where securities are transferred from the owner (the lender) to another party (the borrower). The borrower is obliged to return the securities to the lender either on demand or at the end of the loan term. As a fully collateralised transaction, securities lending is considered a low -risk activity and it usually operates within a stringent legal and regulated framework. 2 Khiyar al-shart is an option to cancel a previous agreed sale within a specific number of days. Resolutions of the Shariah Advisory Council 39 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE ISLAMIC REAL ISLAMIC REAL ESTATE ESTATEINVESTMENT INVESTMENTTRUSTS TRUSTS (ISLAMIC REIT) (ISLAMIC REIT) INTRODUCTION Real Estate Investment Trusts (REIT) or property trust fund refers to the unit trust scheme that invests or plans to invest in the real estate that generates income. It is one of the forms of collective investment related to the real estate that has quite similar characteristics with unit trust funds. Meanwhile, Islamic Real Estate Investment Trusts (Islamic REIT) refers to a form of collective investment related to real estate sector that complies with Shariah principles. The function of REIT is to raise funds from the investors for the purpose of ownership in real estate (through purchase), and then generate main income from rental. REIT also gains income from the sale of real estate and investment. Usually REIT assets cover various real estate sectors such as offices, shopping malls, hospital, hotel and industrial buildings. For investors, the return that they will get is in the form of dividend and capital gain. In addition, the investors will also get benefit from capital appreciation of real estate assets managed by Islamic REIT managers during the period of holding the units that leads to the increment in the value of the unit. In order to enable consistent and comprehensive development of the Islamic REIT industry, the SAC has outlined certain Shariah requirements for the purpose of initial listing of the Islamic REIT. The SAC also considers the process that conforms to Shariah principles in the conversion of conventional REIT to Islamic REIT. The applied Shariah principles involve compliance in stages from conventional to Shariah compliance and it also involve certain benchmarks. Hence, the issues with regard to Islamic REIT investment and the conversion of conventional REIT to an Islamic REIT were discussed in the SAC meeting for its decision. Resolutions of the Shariah Advisory Council 40 of the Securities Commission Malaysia RESOLUTION The SAC had resolved on Islamic REIT as follows: (A) INVESTMENT IN ISLAMIC REIT In this context, the following requirements must be fulfilled: 1 Investments in Real Estate for the Purposes of Initial Listing (i) Permissible Investment in Real Estate An Islamic REIT may invest in real estate where: (a) all of its tenants carry out fully Shariah-compliant activities; or (b) some of the tenants carry out Shariah non-compliant activities, provided the percentage of rental received from all Shariah non- compliant activities1 (Shariah Non-Compliant Rental) is less than 20% of the total turnover of the Islamic REIT (the 20% Threshold). (ii) Investment in a Real Estate where All the Tenants Carry Out Fully Shariah Non-Compliant Activities An Islamic REIT must not invest in a real estate where all tenants carry out fully Shariah non-compliant activities, even if the percentage of the Shariah Non-Compliant Rental is less than the 20% Threshold. 1 List of the Shariah non-compliant activities as determined by the SAC were stated under Appendix 1. Resolutions of the Shariah Advisory Council 41 of the Securities Commission Malaysia (iii) Investment in a Real Estate where the Tenant’s Activities Comprise Both Shariah-Compliant and Shariah Non-Compliant Activities If the tenant’s activities comprise both Shariah-compliant and Shariah non- compliant activities, the following requirements apply for the purposes of ensuring that the percentage of Shariah Non-Compliant Rental is less than the 20% Threshold: (a) The calculation of the Shariah Non-Compliant Rental must be based on the percentage of area occupied for Shariah non-compliant activities to the total area occupied by such tenant; and (b) For activities that do not involve the usage of space such as service- based activities, the Shariah adviser may apply ijtihad (intellectual reasoning) in assessing the Shariah Non-Compliant Rental for such tenant. (iv) Reduction of the Percentage of Shariah Non-Compliant Rental An Islamic REIT must reduce the percentage of the Shariah Non-Compliant Rental from less than the 20% Threshold to less than 5% of the Islamic REIT’s total turnover (the 5% Threshold) by the end of the 10 th financial year post listing. 2 Acceptance of New Tenancy and Renewal of Existing Tenancy for Islamic REIT (i) Acceptance of New Tenancy and Renewal of Existing Tenancy for Islamic REIT Up to the End of the 10th Financial Year Prior to an Islamic REIT reaching the end of the 10th financial year post listing, the Islamic REIT may accept new tenants and renew tenancy agreements of existing tenants whose activities are Shariah non-compliant, subject to the following requirements: Resolutions of the Shariah Advisory Council 42 of the Securities Commission Malaysia (a) Comply with the 20% Threshold The percentage of the Shariah Non-Compliant Rental after such acceptance of new tenants and renewal of existing tenants is less than the 20% Threshold; and (b) Comply with the 5% Threshold The Islamic REIT reduces the percentage of the Shariah Non-Compliant Rental to less than the 5% Threshold by the end of the 10 th financial year. (ii) Acceptance of New Tenants and Renewal of Existing Tenants for Islamic REIT after the End of the 10th Financial Year (a) Comply with the 5% Threshold After the end of the 10 th financial year post listing, an Islamic REIT may accept new tenants and renew tenancy agreements of existing tenants whose activities are Shariah non-compliant, provided that the percentage of Shariah Non-Compliant Rental after such acceptance of new tenants and renewal of existing tenants is less than the 5% Threshold. 3 Acquisition of Real Estate Post Listing (i) Acquisition of Real Estate by Islamic REIT Up to the End of the 10th Financial Year Prior to an Islamic REIT reaching the end of the 10th financial year post listing, the Islamic REIT may acquire real estate subject to the following requirements: Resolutions of the Shariah Advisory Council 43 of the Securities Commission Malaysia (a) Comply with the 20% Threshold The percentage of the Shariah Non-Compliant Rental after such acquisition is less than the 20% Threshold; and (b) Comply with the 5% Threshold The Islamic REIT reduces the percentage of the Shariah Non-Compliant Rental to less than the 5% Threshold by the end of the 10th financial year. (ii) Acquisition of Real Estate by Islamic REIT after the End of the 10 th Financial Year (a) Comply with the 5% Threshold After the end of the 10 th financial year post listing, an Islamic REIT may acquire real estate provided that the percentage of the Shariah Non- Compliant Rental after such acquisition is less than the 5% Threshold. (iii) Acquisition of Real Estate Where All the Tenants Carry Out Fully Shariah Non-Compliant Activities An Islamic REIT must not acquire real estate where all tenants carry out fully Shariah non-compliant activities, even if the percentage of the Shariah Non- Compliant Rental after such acquisition is less than the 20% Threshold or less than the 5% Threshold, whichever applicable. Resolutions of the Shariah Advisory Council 44 of the Securities Commission Malaysia 4 Non-Compliance with the Less than the 5% Threshold In the event that an Islamic REIT fails to reduce the percentage of the Shariah Non-Compliant Rental to less than the 5% Threshold by the end of the 10 th financial year pursuant to subparagraphs 1(iv), 2(i)(b) and 3(i)(b) above, the excess amount of the Shariah Non-Compliant Rental must be channelled to baitulmal or charitable bodies as advised by the Shariah adviser. The excess amount must be channelled within 1 year from the end of each financial year for as long as the Islamic REIT is unable to reduce its Shariah Non- Compliant Rental to less than the 5% Threshold. 5 Takaful Coverage on Real Estate of an Islamic REIT All real estate of an Islamic REIT must be covered by takaful scheme. However, if the takaful scheme is not available to cover the real estate or is not commercially viable, such real estate may be covered under conventional insurance. If a real estate is already covered under an existing conventional insurance policy, the said insurance policy may still be used until its expiry. Once the insurance policy expires, such real estate must be covered by takaful scheme. However, if the takaful scheme is not available or is not commercially viable, such real estate may be covered under the conventional insurance. 6 Usage of Islamic Derivatives In the situation where REIT may use derivatives instrument for the sole purpose of hedging the REIT’s existing risk exposure, an Islamic REIT must use Islamic derivatives. However, if Islamic derivatives are not available or are not commercially viable, the Islamic REIT may use conventional derivatives subject to prior approval from the Shariah adviser being obtained. Resolutions of the Shariah Advisory Council 45 of the Securities Commission Malaysia 7 Permissible Investments Other Than Real Estate and Financing Facilities for Islamic REIT An Islamic REIT must ensure compliance with Shariah principles for the following: (i) Investments in non-real estate assets, deposits and money market instruments; and (ii) Financing facilities. (B) CONVERSION OF CONVENTIONAL REIT TO AN ISLAMIC REIT A listed conventional REIT may convert to an Islamic REIT provided that it complies with the following requirements: 1 Shariah Non-Compliant Rental (i) Comply with 40% Threshold for Shariah Non-Compliant Rental For the purpose of conversion of the conventional REIT to an Islamic REIT, the percentage of the Shariah Non-Compliant Rental must be less than 40% of the total turnover of the conventional REIT (the 40% Threshold) upon submission of information and documents to the SC. (ii) Comply with Less than the 40% Threshold to the 20% Threshold Upon conversion, the Islamic REIT must reduce the percentage of the Shariah Non-Compliant Rental to less than the 20% Threshold by the end of the 5th financial year post conversion. (iii) Comply with Less than the 20% Threshold to the 5% Threshold By the end of the 10th financial year post conversion, the Islamic REIT must further reduce the percentage of the Shariah Non-Compliant Rental to less than the 5% Threshold. Resolutions of the Shariah Advisory Council 46 of the Securities Commission Malaysia (iv) Investment in Real Estate Where All the Tenants Carry Out Fully Shariah Non-Compliant Activities Notwithstanding paragraph (B)(1)(i) above, the Islamic REIT must not invest in a real estate where all the tenants carry out fully Shariah non-compliant activities, even if the percentage of the Shariah Non-Compliant Rental is less than the 40% Threshold. 2 Acceptance of New Tenants and Renewal of Existing Tenants for Islamic REIT Post Conversion (i) Acceptance of New Tenants and Renewal of Existing Tenants for Islamic REIT Up to the End of the 5th Financial Year Post Conversion Prior to an Islamic REIT reaching the end of the 5 th financial year post conversion, the Islamic REIT may accept new tenants and renew tenancy agreements of existing tenants whose activities are Shariah Non-Compliant, subject to the following requirements: (a) Comply with the Threshold less than the percentage of the Shariah Non-Compliant Rental At the Point of Conversion The percentage of the Shariah Non-Compliant Rental after such acceptance of new tenants and renewal of existing tenants is less than the percentage of the Shariah Non-Compliant Rental at the point of conversion; and (b) Comply with the 20% Threshold The Islamic REIT reduces the percentage of the Shariah Non- Compliant Rental to less than the 20% Threshold by the end of the 5 th financial year. Resolutions of the Shariah Advisory Council 47 of the Securities Commission Malaysia (ii) Acceptance of New Tenants and Renewal of Existing Tenants for Islamic REIT Up to the End of the 10th Financial Year Post Conversion Prior to an Islamic REIT reaching the end of the 10th financial year post conversion, the Islamic REIT may accept new tenants and renew tenancy agreements of existing tenants whose activities are Shariah Non-Compliant, subject to the following requirements: (a) Comply with the 20% Threshold The percentage of the Shariah Non-Compliant Rental after such acceptance of new tenants and renewal of existing tenants is less than the 20% Threshold; and (b) Comply with the 5% Threshold The Islamic REIT reduces the percentage of the Shariah Non- Compliant Rental to less than the 5% Threshold by the end of the 10 th financial year. (iii) Acceptance of New Tenants and Renewal of Existing Tenants for Islamic REIT after the End of the 10th Financial Year Post Conversion (a) Comply with the 5% Threshold After the end of the 10th financial year post conversion, an Islamic REIT may accept new tenants and renew tenancy agreements of existing tenants whose activities are Shariah non-compliant. However, the percentage of Shariah Non-Compliant Rental after such acceptance of new tenants and renewal of existing tenants is less than the 5% Threshold. Resolutions of the Shariah Advisory Council 48 of the Securities Commission Malaysia 3 Acquisition of Real Estate by an Islamic REIT Post Conversion (i) Acquisition of Real Estate by an Islamic REIT Up to the End of the 5th Financial Year Post Conversion Prior to an Islamic REIT reaching the end of the 5 th financial year post conversion, the Islamic REIT may acquire real estate, subject to the following requirements: (a) Comply with the Threshold Less than the Percentage of the Shariah Non-Compliant Rental at the Point of Conversion The percentage of the Shariah Non-Compliant Rental after such acquisition of the real estate is less than the percentage of Shariah Non-Compliant Rental at the point of conversion; and (b) Comply with the 20% Threshold The Islamic REIT reduces the percentage of the Shariah Non- Compliant Rental to less than the 20% Threshold by the end of the 5 th financial year. (ii) Acquisition of Real Estate by an Islamic REIT Up to the End of the 10th Financial Year Post Conversion Prior to an Islamic REIT reaching the end of the 10 th financial year post conversion, the Islamic REIT may acquire real estate, subject to the following requirements: (a) Comply with the 20% Threshold The percentage of the Shariah Non-Compliant Rental after such acquisition is less than the 20% Threshold; and Resolutions of the Shariah Advisory Council 49 of the Securities Commission Malaysia (b) Comply with the 5% Threshold The Islamic REIT reduces the percentage of the Shariah Non- Compliant Rental to less than the 5% Threshold by the end of the 10 th financial year post conversion. (iii) Acquisition of Real Estate by an Islamic REIT after the End of the 10th Financial Year Post Conversion (a) Comply with the 5% Threshold After the end of the 10th financial year post conversion, an Islamic REIT may acquire real estate, provided that the percentage of Shariah Non- Compliant Rental is less than the 5% Threshold. Note: For the purpose of calculation of the financial year on the conversion of the conventional REIT to an Islamic REIT, the calculation of the 1 st financial year shall commence on the next financial year after the deed to effect the conversion has been registered with the SC. (iv) Acquisition of Real Estate Where All the Tenants Carry Out Fully Shariah Non-Compliant Activities Notwithstanding paragraphs (B)(3)(i), (ii) and (iii) above, an Islamic REIT must not acquire real estate in which all the tenants carry out fully Shariah non-compliant activities, even if the percentage of the Shariah Non- Compliant Rental after such acquisition is less than the respective thresholds mentioned in the said paragraphs. Resolutions of the Shariah Advisory Council 50 of the Securities Commission Malaysia 4 Non-Compliance with the Reduction to Less than the 20% Threshold or the 5% Threshold In the event that an Islamic REIT fails to reduce the percentage of the Shariah Non-Compliant Rental to less than the 20% Threshold or the 5% Threshold, whichever applicable, the excess amount of the Shariah Non-Compliant Rental must be channelled to baitulmal or charitable bodies as advised by the Shariah adviser. The excess amount must be channelled within 1 year from the end of each financial year for as long as the Islamic REIT is unable to reduce its Shariah Non-Compliant Rental to less than the 20% Threshold or the 5% Threshold, whichever applicable. 5 Borrowings for Conventional REIT For the purpose of conversion to an Islamic REIT, a listed conventional REIT which has existing conventional borrowings must, as soon as practicable, refinance such borrowings with Islamic financing facilities. 6 Takaful Coverage on Real Estate at the Point of Conversion At the point of conversion, where a real estate is already covered under an existing conventional insurance policy, the said conventional insurance policy may still be used until its expiry. Once the policy expires, such real estate must be covered by takaful scheme. However, if the takaful scheme is not available or is not commercially viable, such real estate may be covered under the conventional insurance. Resolutions of the Shariah Advisory Council 51 of the Securities Commission Malaysia 7 Usage of Islamic Derivatives Upon conversion, the Islamic REIT may continue to use its existing conventional derivatives. However, all new derivatives for the purpose of hedging the REIT’s existing risk exposure must be Islamic derivatives. If Islamic derivatives are not available or are not commercially viable, an Islamic REIT may use conventional derivatives subject to prior approval from the Shariah adviser being obtained. 8 Permissible Investments other than Real Estate At the point of conversion, all investments in non-real estate assets, deposits and money market instruments must comply with Shariah principles. Appendix 1 (i) Conventional banking and lending; (ii) Conventional insurance; (iii) Gambling; (iv) Liquor and liquor-related activities; (v) Pork and pork-related activities; (vi) Non-halal food and beverages; (vii) Tobacco and tobacco-related activities; (viii) Stockbroking or share trading in Shariah non-compliant securities; (ix) Shariah non-compliant entertainment; and (x) Other activities deemed non-compliant according to Shariah principles as determined by the SAC. Resolutions of the Shariah Advisory Council 52 of the Securities Commission Malaysia ISLAMIC CAPITAL MARKET PRODUCTS FROM SHARIAH PERSPECTIVE ISLAMIC REAL ESTATE INVESTMENT TRUSTS SHARIAH-COMPLIANT PREFERENCE SHARES (ISLAMIC REIT) INTRODUCTION Issuance of preference shares (PS) is one of the methods for a company to raise capital and obtain funding. Based on the provision in Section 2(1) of the Companies Act 2016, preference shares are defined as follows: “a share by whatever name called, which does not entitle the holder to the right to vote on a resolution or to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up, or otherwise”. As an alternative to the existing conventional PS in the market, there are efforts by companies listed on Bursa Malaysia Securities Berhad (Bursa Malaysia) to issue PS that complies with the principles of Shariah. In order to ensure that the PS that will be issued in the market complies with the principles of Shariah, the SAC had comprehensively discussed the features of PS as well as issues related to PS from Shariah perspective. The resolutions made by the SAC also took into account the current practice of issuing PS in Malaysia and the relevant legal provisions in the Companies Act 2016. If there are new proposals from the industry on Shariah-compliant PS based on other Shariah principles which are not prescribed in this resolution, the SAC will consider the suitability of such principle to be applied in Shariah-compliant PS. RESOLUTION SAC in a series of meetings had discussed the features of PS and its related Shariah issues. The SAC had resolved on the following resolutions on Shariah-compliant PS which are applicable for the issuance of Shariah-compliant PS by companies listed on Bursa Malaysia. Resolutions of the Shariah Advisory Council 53 of the Securities Commission Malaysia (A) Shariah Principle and Related Matters 1 Shariah Principle Applied in Shariah-compliant PS (a) Takyif Fiqhi (Adaptation of Fiqh) The appropriate takyif fiqhi for Shariah-compliant PS is the principle of musharakah. (b) Contracting Parties in Musharakah (i) Musharakah in Shariah-compliant PS is between PS holders and ordinary shares (OS) holders where both parties contribute capital to the company. (ii) PS holders are treated as new musharik (partner) in the existing musharakah (i.e musharakah among OS holders), whereby they invest in an existing musharakah venture (i.e. general business of the same company). PS holders are subject to different terms as compared to OS holders. (c) Execution of the Musharakah Contract The execution of the musharakah contract in PS is done through subscription of the PS by the PS holders after they have agreed to the terms and conditions in the relevant document of the PS. 2 Entitlement of PS Holders to Dividend up to the Declared Profit From Shariah perspective, it is permissible for PS holders to receive dividend up to the declared profit by the company based on the concept of taradhi (mutual consent). Resolutions of the Shariah Advisory Council 54 of the Securities Commission Malaysia 3 Implementation of Waiver of Right in PS (a) Waiver of Right by the OS holders to the PS holders Waiver of right by the OS holders to the PS holders may be implemented through several mechanisms in the following events: (i) Distribution of Dividend (aa) Tanazul The OS holders waive their right to receive dividend after profit is realised by giving preference to the PS holders. Tanazul takes place via ratification by the Board of Directors of the company based on the mandate given by the OS holders. (bb) al-Wa`d bi al-Hibah The OS holders promise to waive their right through hibah to receive dividend after profit is realised by giving preference to the PS holders. Hibah contract takes place via ratification by the Board of Directors of the company based on the mandate given by the OS holders. (ii) Dissolution or Winding-up of Company (aa) Tanazul The OS holders waive their right to receive any amount pursuant to the dissolution or winding-up of the company by giving preference to the PS holders. Tanazul takes place via ratification by the Board of Directors of the company based on the mandate given by the OS holders. (bb) al-Wa`d bi al-Hibah The OS holders promise to waive their right through hibah to receive any amount pursuant to the dissolution or winding-up of the company by giving preference to the PS holders. Hibah contract takes place via ratification by the Board of Directors of the company based on the mandate given by the OS holders. Resolutions of the Shariah Advisory Council 55 of the Securities Commission Malaysia (b) Waiver of Right by the PS holders to the OS holders Waiver of right by the PS holders to the OS holders may be implemented through tanazul principle in the following situations: (i) Dividend Declared by the Company in Excess of the Expected Dividend Rate The PS holders waive their right to receive dividend in excess of the expected rate once the profit is realised. (ii) Partially-participating PS The PS holders waive their right to participate entirely in the excess profit on a pro-rata basis and will only be entitled to receive the dividend up to the rate stipulated in the terms of the PS issuance. (iii) Zero dividend PS The PS holders waive their right to receive dividend during the tenure of the PS issuance. (B) Features of PS 1 Voting Right PS holders are not entitled to the voting right as provided under the Companies Act 2016. From Shariah perspective, it is permissible since PS holders have agreed to such arrangement during subscription of PS. 2 Dividend (a) Types of Dividend Distribution The company will offer certain dividend rate that will be received by the PS holders every year. Such rate is known as expected preferential dividend rate. However, the rate is indicative and can only be declared out of available profits of the company on condition that the company is Resolutions of the Shariah Advisory Council 56 of the Securities Commission Malaysia solvent1 as provided under the Companies Act 2016. The dividend distribution shall be made based on the approval given by the Board of Directors of the company. In general, there are three (3) types of dividend distribution or payment that are permissible from Shariah perspective as follows: (i) Cumulative Dividend PS with cumulative dividend feature refers to PS where its dividend rate (partly or wholly) will be carried forward to the following years and accumulated until its maturity date or as long as the PS is not redeemed. This happens when the company could not or did not declare the dividend on the specified dividend distribution date. The rate that can be accumulated and carried forward is as follows: (aa) Up to the expected preferential dividend rate; or (bb) Difference between dividend paid and expected preferential dividend rate. However, the amount of dividend to be paid is subject to the availability of profit and declared by the company on the financial year of the dividend payment. If there is no available profit on the maturity or redemption date of PS, the company will not declare any dividend and will not pay such accumulated dividends to PS holders. (ii) Non-cumulative Dividend PS with non-cumulative dividend feature refers to PS where its undeclared dividend rate are not accumulated or carried forward. The company is only required to pay the dividend declared in the current year to PS holders. 1 Section 132 (3) of the Companies Act 2016 provides that a company is regarded as solvent if the company is able to pay its debts as and when the debts become due within twelve months immediately after the distribution is made. Resolutions of the Shariah Advisory Council 57 of the Securities Commission Malaysia (iii) Zero Dividend PS with zero dividend feature refers to PS that do not distribute any dividend to its holders. Nevertheless, usually for issuance of this type of PS, the company will offer certain incentives to attract investors to subscribe such PS. From Shariah perspective, as long as such incentives do not have the element of capital and/ or profit guarantee by the contracting parties, it is permissible. Among the incentives allowed include but not limited to the following: (aa) Determination of certain redemption method that is subject to the SAC resolution in relation to redemption of PS; (bb) Determination of certain conversion method that is subject to the SAC resolution in relation to conversion of PS; (cc) Offering of discount on the issue price of the PS; and (dd) Offering of detachable company warrants. (b) Distribution of Dividend at a Lower Rate than the Available Profit In the event that the available profit earned by the company is lower than the expected dividend rate, the distribution of dividend to PS holders at a lower rate than the available profit earned is permissible based on the terms and conditions of the PS that has been agreed upon the subscription of PS. 3 Participating PS PS with participating feature refers to the right of PS holders to participate in the surplus profit of the company after the distribution of dividend is made. This type of PS is divided into three (3) categories as follows: (a) Non-participating In general, PS is considered as non-participating unless otherwise stated clearly in the terms of issuance of PS. Non-participating PS Resolutions of the Shariah Advisory Council 58 of the Securities Commission Malaysia holders are not entitled to participate in the surplus profit earned by the company. (b) Partially-participating PS holders and OS holders will participate in the surplus profit earned by the company after the distribution of dividend is made between them. However, the participation of PS holders in the surplus profit is only limited to a rate that has been set out in the terms and conditions of the PS issuance. (c) Fully-participating PS holders and OS holders will participate in the surplus profits earned by the company on a pro-rata basis after the distribution of dividend is made between them. From Shariah perspective, all three (3) categories of PS as stated above are permissible. 4 Conversion (a) Convertible PS This type of PS entitles its holders the right or option to convert the PS to OS. From Shariah perspective, this type of PS is permissible based on the concept of istibdal (substitution). Among the conversion methods which are permissible include but not limited to the following: (i) Conversion ratio; (ii) Conversion ratio and conversion price; and (iii) Cash paid for the difference between the PS surrendered and the conversion ratio. Conversion method used must be agreed by the contracting parties and has no element of capital guara

Resolutions of the Shariah Advisory Council of the Securities Commission Malaysia (2022) PDF

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