legal framework of islamic capital market

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ISB 658ISLAMIC FINANCIAL LEGAL FRAMEWORK

TOPIC: LEGAL FRAMEWORK OF ISLAMIC CAPITAL MARKET

PREPARED BY:SOLAHHIAH BINTI SHUIB JULIANA BINTI TAJUDDIN NUR BAISYATUL ADIELA BINTI BURHAN WAN NUR HASYIMAH BINTI WAN HANAFISITI NUR NADHIRA BT MUHAMMAD NAFIZON

PREPARED FOR: ASSOCIATE PROFESSOR DR.CHE ZUINA BT ISMAIL

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Contents 1.0 Introduction

2.0 Development of Islamic Capital Market

3.0 Islamic Capital Market Products3.1 Fundamental of Sukuk

3.1.1 Sukuk using al-ijarah Structure3.1.2 Sukuk using Musyarakah Structure-13.1.3 Structure of Sukuk Musyarakah – 23.1.4 Exchangeable Sukuk Structure3.1.5 Exchangeable Sukuk Structure- Exchangeable

Mechanism3.1.6 Sukuk using al-istisna’ Structure

3.2 Shariah Compliant Securities3.3 Shariah-Based Unit Trust3.4 Islamic Real Estate Investment Trust (REITs)3.5 Islamic Exchange Traded Fund (ETF)



4.0 Statutes and Guidelines Governing Islamic Capital Market4.1 Securities Commision Act 19934.2 Guidelines on the Offering of Private Debt Securities4.3 Guidelines on the Offering of Asset Backed Debt Securities4.4 Guideline on the Minimum Contents of Requirements for the

Trust Deeds4.5 Guidelines on Content of Prospectus for Debentures4.6 Controller of Foreign Exchange4.7 Rules on the Scripless Securities under the Real Time

Electronic Transfer of Funds and Securities (RENTAS) System

4.8 Fully Automated System For Issuing/ Tendering (FAST)4.9 Rules on Bond Information and Dissemination System (BIDS)

5.0 Conclusion

6.0 Reference



1.0 Introduction

Capital market is the place where long-term financial instruments with maturity exceeding one year are issued and traded.

The goal is to channel savings into long term productive investments.

Participant in this market consists of government and private sectors.

The financial instruments in the capital market may be categorized into equity instruments and debt instruments.

Equity instruments are in the form of share certificates, either common stock or preferred stock.

Debt instruments are made up of bonds which may be classed into common bonds and convertible bonds.



Difference between stock and bond

STOCK BOND

For a person who holds share of a company or the stock, there is no guarantee that he shall receive annual dividends since the company has no legal obligation to pay dividends to shareholders.

On the other hand, when bonds are issued, the company is bound by law to pay annual interest in accordance with the terms made at the time of the issuance.



Continue..

In Malaysia, any company doing business or wishing to do business in the country must be registered with the Companies Commission of Malaysia under the Companies Act 1965.

The owner and the company are two separate entities.

The relationship between the owner of the company and the company itself depends on the amount and types of shares held.

On the other hand, shareholders are not responsible for all actions undertaken by the company.



On the contrary, non-cumulative preferred stockholders only receive dividend in the current year and it does not discuss any claim on missed dividends.

Preferred stock consists of cumulative and non-cumulative.

Cumulative stock refers to the continuous claim on the dividends and any unpaid dividends will be accumulated until the company resumes paying them.

The difference between common stock and preferred stock

Common stock Preferred stock

For common stock, dividends paid depend entirely on the discretion of the Board of Directors.

The payment of dividends for preferred stock is usually in the form of fixed percentage and it takes priority over common stock dividends.



Continue…In the issuance and transaction of stock, the stockholder’s financial liability is limited to the amount he has invested in the event that the business incurs a loss.

This concept of limited liability is actually related to the mudharabah principle in Islam.

Since a stock represent a financial claim or is a title of ownership, these certificates do not constitute money.

Hence, the negotiation and transfer of ownership pertain only to the object of the certificate and not the certificate itself which is regarded from the legal point of view as a proof of the claim.

Preferred stock cannot be bought by Muslims and Islamic banks because it is associated with pre-determined fixed rate of return which is prohibited by Shari’ah.



Continue…

This view was researched and reviewed by the Shariah Advisory Council of the Securities Commission of Malaysia.

The Council, in its 20th meeting on 14 July 1999, put forward a resolution that non-cumulative preferred shares be allowed by Shari’ah by applying the concept of tanazul which means to drop claims to right.

This means that the percentage of return to preferred stockholders is based on profit and not the face value of the preferred stocks.

Subsequently at every general meeting, the common stockholders would also commit tanazul in order to grant dividends to preferred stockholders based on the percentage of net profit obtained by the company.



Continue…

• Similar to any ordinary public offering, a prospectus describing the financial and non-financial aspects of the company will have to be provided to potential investors.

• Among the important information that should be stated are:

Investors must be aware that the contract is governed by the principle of mudharabah.

The method of distributing returns to investors must be clearly stated in the contract.

The purpose of the stock issuance must be clear.



Islam forbids speculation because it involves gambling and maisir.

The ulama are of the view that for as long as no investment has been undertaken, a stock cannot be resold at a higher price during the period after it is issued and bought thus it should be sold at its face value.

But the issue of speculation in the stock market has not met with any resolution due to the difficulty in determining its position.

Stockholders’ returns from their investment in stocks are of two types, capital gain and dividends.

Capital gain is the profit made as a result of selling stocks for more than the original purchase price.

Dividends, on the other hand, are the cash distribution of earnings to the stockholder.

Continue..



Although scholars associate speculation with gambling, this view is not reciprocated by the Shariah Advisory Council of the Securities Commision of Malaysia.

At its 10th general meeting on 16-17 October 1997, this Council ruled that speculation may be allowed.

Although speculation was never discussed by Muslim jurist, the bai muzayadah principle may be associated with the practice.

In Malaysia, the Shariah Advisory Council of the SC publishes a list of Shariah compliant stocks.

At the end of November 2008, a total of 855 Shari’ah-compliant securities listed on the main board, second board and MESDAQ market were approved by the Shariah Advisory Council of the Securities Commission of Malaysia.

Continue..



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This represents 85% of the total securities listed. Shari’ah-compliant securities as defined by the Council include ordinary shares, warrants as well as transferable subscription rights.

The three main elements that make stocks non-permissible are riba, gambling and prohibited products or related products.

But even so, investment is permitted in activities that have tolerable level of mixed contributions from permissible and non-permissible activities where the non-permissible activities represent only a small percentage of the activities and do not exceed the benchmarks established by the Council.



2.0 DEVELOPMENT OF ISLAMIC CAPITAL MARKET

Islamic private debt securities continued to be a favourite instrument among corporate bodies for long-term financing.

There can be doubt that the government is intent on shaping Malaysia into a leading international Islamic capital market centre.

Since almost a decade ago when the first Islamic private debt securities (IPDS) was issued, the ICM has developed and produced a wide range of equity products, debt securities and managed funds.

Malaysia Rating Corp Bhd says that 77% of the total issues rated in 2002 (going by value) were Islamic papers.



Most of the IPDS approved by the SC to date were structured based on the principles of Bai’ Bithaman Ajil (BBA) and Murabahah. The SC had, in July 2002, informed relevant industry bodies and associations on the importance of recognizing the SAC as the only body that can make pronouncements to the public on any Shari’ah matters in relation to the capital market.

This was done to ensure harmonization and standardization of Shari’ah rulings and to avoid possible divergence of Shari’ah interpretations among Shari’ah scholars in the country.

The in-house Shari’ah advisers or committees of the members of industry bodies or associations should provide advice and guidance on internal process only and should not make pronouncements to the public.

Continue..



3.0 Islamic Capital Market Products

3.1 Fundamental of Sukuk • literal meaning of sukuk is certificate• Technically sukuk refer to securities, notes, paper or

certificates, with features of liquidity and tradability. • The sukuk are structure based on the specific contract of

exchange of shariah compliant assets• It is applying in the various shariah principles, such as bai’

bithaman ajil, murabahah, ijarah, mudharabah and musharakah that allow the investors to earn profits from the transactions.

• is regulated by the SC through the framework provided under the Guidelines on the Offering of Islamic Securities.


Sukuk holder

Obligator as seller SPV

Trust certificate issue

3.1.1) Sukuk using al-Ijarah Structure

1) Sell property to SPV

7) Payments

2) Leased asset to obligator

4) Trust certificate issued to investors

9) SPV pays coupon to investors

6) Payment received from investor by SPV

8) Obligator made periodic lease payment to SPV

3) Issued trust certificate

5) Investor made payments

3.1.2) Sukuk using Musyarakah structure – 1

Corporate

Musyarakah

SPV

Investors

1) Physical asset contribution

6) Undertakes to buy Musharakah shares of the SPV on a periodic

basis

2b) issue proceeds

5) Issues sukuk Musharakah + periodic profit

2a) sukuk proceeds

3) Periodic profit

4) Periodic profit + incentive fee

3.1.3) Structure of Sukuk Musyarakah - 2

Investor Investor Investor

Issuer

Construction of project /

undertaking the Musyarakah

venture

Trustee

1) Musyarakah venture between the investors

2) The Musyarakah venture shall be carried out through the issuer in its capacity as an agent

3) Issuer shall issue the sukuk Musyarakah to the

Musyarakah martner

4) Trustee shall declare a trust over the trust asset and all rights under the

Musyarakah venture

3.1.4) Exchangable Sukuk Structure

Investors

Issuer ( X Y Z)

SPV ( A B C) Company A

Obligor (company A )

sukuk

Sale of equity

Sukuk proceeds

Cash settlement purchase right deed

Sale of equity pool

Sale price (nominal)

Sale price (nominal)

Purchase undertaking deed

3.1.5) Exchangable Sukuk Structure- Exchangable Mechanism

Investors (sukuk holders)

Exchange Agent

Obigor Company A

Issuer ( XYZ Ltd)

Equities/cash

Pay cash is (order is accepted)

Offer to purchase exchange property

Reques

t equity

carv

e-out

Equity

corresponding

to sukuk

3.1.6) Sukuk using al- Istisna’ Structure

Sukuk Holders

Contractor SPV End Buyer

2) Sell asset

1) Sukuk proceed

4a) transfer title to asset

4b) pay monthly installment3) Payments made

5) SPV pays coupon to investor


3.2 Shariah Compliant Securities

Shariah compliant securities are securities of a Bursa Malaysia-listed company which as Shariah have been classified as Shariah permissible for investment, based on the company’s compliance with Shariah principle in terms of its primary business and investment activities.

In the process of determining the Shariah Status of listed securities, the SAC developed several basic Shariah criteria as guidance where the criteria based on the Quran and Sunnah.

The SAC gave further consideration to companies that were involved in both Shariah-compliant and non-compliant activities by applying the concept of maslahah (public interest) and umum balwa (common plight).

For this purpose, specific benchmarks and additional criteria were formulated to enable the SAC to determine the Shariah status of such companies.



3.3 Shariah-based Unit Trust

1) Structure of the Shariah-based unit trust fund consists of:• A manager- handles the investment and operations of

the fund.• A trustee- protects the rights and interests of the unit

holders.• Unit holders- investors who are entitled to a

proportionated interest of the assets of the fund. The obligations of these three parties are spelt out in the deed of the fund.



The types of the fund are as follows:

Continue….

TYPES OBJECTIVES SUITABLE FOR

1) Income funds

Invest in Islamic fixed income securities and huge dividend-yielding Shariah-compliant shares, with a view to pay out most of the return.

Investors with low-risk appetite, seeking income with some level of growth

2) Capital growth fund

Invest in Shariah-compliant shares, with a view to maximize capital growth over the long term.

Investors with high-risk appetite and are keen on capital accumulation.

3) Aggressive growth funds

Similar to capital growth funds but with investment in aggressive, fast track Shariah-compliant shares that promise high returns, but with higher risk

Investors with high-risk appetite.



TYPES OBJECTIVES SUITABLE FOR

4) Balance funds

Three main objectives: income, moderate capital appreciations and capital preservation.- invest across a broad range of assets categories including Shariah-compliant shares, Islamic fixed income securities and cash.

Well-diversified and investors that seeking reasonably safe investments where the risks are lower and which produce average return.

5) Index fund

Invest in the basket of Shariah-compliant shares to track the performance of a selected stock market index.

Investors seeking medium to long-term capital appreciation

6) Bond funds

Invests in Islamic fixed income securities such as Islamic bonds and short-term money-market instruments

Investors seeking greater security in the form of capital preservation and income with minimal risk.

Continue….



3.4 Islamic Real Estate Investment Trust (i-REITs)

The issuance of the real estate investment trusts (REITs) guideline by the SAC has helped kick-start the REITs industry in Malaysia. Subsequently, the SC released the Guidelines for Islamic Real Estate Investment Trusts (I-REITs Guidelines) to facilitate the introduction of Shariah-compliant REITs.

The I-REITs Guideline was set as the global benchmark for the development of I-REITs Guideline is to provide clear guidance on and new investment opportunities in collective real estate investments through a Shariah-compliant capital market instrument



3.5 Islamic Exchange Traded Fund (ETF)

ETFs are essentially unit trust funds that are listed and traded on a stock exchange. They are open-ended with a unique in-kind creation and redemption mechanism supported by a system of participating dealers and liquidity providers.

ETFs are listed and therefore their units can be bought and sold

anytime during stock exchange trading hours. Investors buy and sell ETF units through their stockbroker rather than through unit trust agents, ETFs are index tracking fund.

The main difference between a conventional ETF and Islamic ETF is the benchmark index that the Islamic ETF tracks. An Islamic ETF only tracks an Islamic benchmark index where the index constituents comprises of the companies which are Shariah-compliant



4.0 Statutes and Guidelines Governing Islamic Capital Market

4.1 Securities Commission Act 1993Any person who issues, offer for subscription or purchase, or makes an invitation to subscribe for or purchase debentures would require the approval under s32 of the Act.

Sc will act as the sole regulatory authority both in respect of the issuance of securities as well as in respect of the registration of prospectuses.

In considering proposals by public companies to undertake an issue of debt securities whether convertible or not :company is in need of fund

For the expansion of the business activities For diversification of business to achieve synergy To refinance its existing borrowings



S32(2),a person who purpose to do any the following proposal would have to submit to SC for approval as provided in s32(3) and (4):

make available, offer for subscription or purchase, or issue an invitation to subscribe for or purchase securities in Malaysia

make available,offer for subscription or purchase,or issue an invitation to subscribe for or purchase, outside Malaysia, securities of public company, or to list such securities on a securities exchange outside Malaysia.

Make a bonus issue of securities of a public company other than by way of the capitalization of inappropriate profits



All proposal submitted to the SC for its consideration, including the issuance of IPDS, shall confirm the following :

The applicant must public company

Listed companies which submit a proposal to the SC for its consideration must do so through a merchant bank.

Unlisted company through merchant bank or an approved firm of public accountants. Seek a waiver from making a submission

through a merchant bank or an approved firm of public account.



4.2 Guidelines on the Offering of Private Debt Securities

Any person who is corporation within the meaning of (1) of s2 of the act is eligible under this guideline.

Anybody corporate formed or incorporated or existing within Malaysia or outside Malaysia and includes any foreign company

For any corporation, the necessary approvals from other regulatory bodies would have to be obtained prior to the submission of any written

declarations and information to the SC.

To consider in undertaking IPDS issue would be rating by a rating agency approved by SC. However, a rating is not required if the IPDS issued are non-transferable and non-tradable and whose investors do not require a

rating.



Item 32 of the Guidelines provides additional requirements for IPDS. The issuer must appoint either:

i. an independent Shariah adviser (s) who has been approved by SC who meets the following criteria-a) is not an undischarged bankrupt, b)not been convicted for any offence of criminal, c)good repute d) possesses the relevant qualifications and expertise,

particularly in Fiqh Muamalah and Islamic Jurisprudence and has a minimum of 3 years working experience or exposure in Islamic Finance

ii.Islamic bank or licensed institution approved by BNM to carry out Islamic Banking (IB) scheme.



The reason for grouping the products under IPDS is to encourage market participants to develop products using the Shariah principle approved by SC, even though some

of them not necessarily fall under the category of “debt instruments”.

According to the guidelines, any Shariah principle and concept adopted in order to structure an IPDS must be based on principles and concepts approved by SC’s of SAC



4.3 Guidelines on the Offering of Asset Backed Debt Securities

ABS is a private debt security that is issued according to a

securitization transaction.

The securitization transaction can be understood by involving the transfer of assets or risks to a 3rd party where such transfer is

funded by the issuance of debt securities to investors.

Assets that want to be securitized must generate cash flow and be transferred at a fair value.



Originators must have a valid and enforceable interest towards the asset and in the cash flow prior to the securitization transaction.

If the originator is a charge as in the case of an Ijarah, the charge must have been created for a period of more than 6 months before the transfer. Assets must not contradict with Shariah principles where Islamic ABS is involved.

The originators must be incorporated in Malaysia

The assets that are transferred must be put beyond the reach of the originator and its creditor even in bankruptcy.

The risk from the transfer of that asset by an originator to an SPV may be re-characterised as a financing transaction

The SPV itself must be ‘ bankruptcy remote’ which mean that, any other business activity that are not related with the securitization transaction should not exist.



SPV should merely hold assets, issued ABS and ensure appropriate managerial of the cash flow from the assets.The originator may only purchase senior notes that junior notes ABS issued by the SPV up to 10% of the original amount of the senior notes ABS issued by the SPV at the market value at anytime unless otherwise permitted by the SC.

Originator as primary subscriber resulting in the originator holding more than 10% of the ABS , the originator must make best endeavors to place out such excess ABS within e period of not more than 3 months from date of issuance of such ABS.

The issuance of junior notes for purpose of credit enhancement of the transaction to obtain a better rating for the ABS notes issued.



The credit enhancement are provided by the originator and also having reserve fund , third party or parental guarantees and cash collateral account.The originator also act as services that make sense for the originator to be the servicer because the source of all the asset transferred to SPV.

SPV being a special purpose vehicle established may not have the capability and expertise to administer and mange the assets.

In service agreement, the service provided on arm's length basis on market term and conditions.



Some of the information included :

It must be submitted to SC. Subject to the non-application of the SC's Policies and Guidelines on Issue/offer of the Securities on the securitization transaction, approval within 28 working days from the date of receipt of all declarations, complete information and documentation under the guideline.

detailed explanation of the flow of the fund

detailed description of the structure of the securitization transaction and significant agreement relevant to the

structure

the disclosure of the risk factor associated with investing in ABS



• Fund raised from any issue, offer or invitation of ABS under the guideline must not be channeled by the originator and the SPV to finance such activities as maybe announced by the National Bond Market Committee from time to time.

• However, SC on behalf of the National Bond Market committee announced on August,2003 the relaxation of some of the restriction on the utilization of process from the issuance of the private debt securities for the construction of the hypermarket.

• The issue could be used to finance the development of hypermarket subject to certain conditions that the proposal to operate a hypermarket has to be approved by the Domestic Trade and Consumer Affairs Ministry

• Prior to this, “construction of hypermarket” fell under the definition of 'construction of shopping complex'.



4.4 Guideline on the Minimum Contents of Requirements for the Trust Deeds

Trust deeds used to be the responsibility of the Register of Companies. The approvals and registration of trust deeds rest with SC although the filling of trust deeds has to be done with the Register of Companies, save and except for unit trust which to be submitted to the SC for registration.

It is governed by the Guidelines on the Minimum Contents Requirements for Trust Deeds, the fact that effect the new provision under Division 4 of Part IV of the Act. The Guidelines provide for the positive requirements for a trust deed in both public offer and private placements.

The guidelines provide substantial coverage of key areas in the trust deed. The power and duties of the trustees are well defined.

Even in the areas of sinking fund, it provides that the provision must be made for an Islamic based account for Islamic debentures and to state the holder and operator of the account. The borrowers’ covenant to pay and comply by the trust deed and debenture are specified in it.

It also gives a number of guidelines with regards to the events constituting default and the remedies for such default. There is even the requirement to have the form and terms and conditions of the certificates representing the debentures.



4.5 Guidelines on Content of Prospectus for Debentures

The structure of the prospectus is well provided under the specific requirement in which it stipulates the necessary items to be inserted in every part of the structure.

With the coming into force of amendments to the Act, the SC is now the approving and registering authority for prospectuses other than for the offer for subscription for purchase of shares or debentures by an unlisted recreational club.

In addition, to the requirements which apply to both Islamic and Conventional debentures, a few pertinent points in relation to Islamic debenture would have to be noted.



The requirements which apply to both Islamic and Conventional debentures

Concerning the terms and conditions of the debentures, the frequency of profit payments and not interest payments.

It provides for the identification of Shariah principle and concept adopted.

As for all other Islamic capital market products, the type of underlying asset for the transaction would have to be stipulated.

The industry which the issuer operates and description of the industry which the issuer is in.

With regard to experts’ statements and reports, excerpts from the Shariah adviser’s report should be disclosed in the prospectus.

The qualification and experience of the Shariah should be also disclosed.

Continued……



4.6 Controller of Foreign Exchange

The Guidelines on the Offering of PDS provides that funds rose in Malaysia by any person, including a non-resident and non-resident controlled company issued by the Controller of Foreign Exchange from time to time.

Practice Note 1 of the SC provides for the application of the Guidelines on the offering of PDS to offer, issue or invitation of foreign currency denominated PDS. - It seeks to display, vary or clarify the application of the Guidelines on the offering of PDS of a Malaysian public company made exclusively to persons outside Malaysia. Under its clarification on the utilization of proceeds requirements, it provides that for funds raised from issues, offers or invitations in relation to foreign currency denominated PDS and are intended to finance activities within Malaysia. Besides, all such funds raised by the Malaysian public company through such offers, issues or invitations must comply with any requirements and regulations as may be issued by the Controller of Foreign Exchange from time to time.



4.7 Rules on the Scripless Securities under the Real Time Electronic Transfer of Funds and Securities (RENTAS) System

• The objective of the system is to provide a uniform set of rules and procedures to govern the issuance and settlement of scripless securities under the RENTAS system.

• All securities issued in scripless form through RENTAS must comply with the terms and conditions as set out in the Information Memorandum, Depository and Paying Agency Agreement (DPA), Trust Deed and other relevant documents binding the issues.

• The agreement must be in accordance with the standard format, and any amendments to the DPA must be made with prior approval from BNM



Continue….• Each issue shall be represented by a global certificate and

has to be lodged with the Central Depository for safe, custody.

• Submission of the certificate for safe custody by the LA must be made at least one business day before the issue day.

• In terms of allotment procedures, RENTAS shall initiate the allotment process to the successful principal dealers, who are licensed Financial Institutions appointed by BNM to carry on the business of dealing in specified instruments

• The allotment process shall also include bids tendered through the principal dealers



Cont…• After successful crediting and debiting of the principal

dealer’s securities and cash accounts, a completion advice shall be sent to the principal dealer.

• The principal dealer will construct a re-allotment advice to the successful subscribers on the allotment date or the issue date.

• If there are insufficient funds in the dealer’s cash accounts at the beginning of the issue date, the allotment transaction shall be queued (priority queue).

• If other than the principal dealer’s network, RENTAS will transfer the whole stock to the lead arranger’s securities account.



Cont…• The sale/transfer shall be affected through RENTAS,

subject to the availability of sufficient funds in the cash

accounts of the said authorized depository Institution.• If the issuance is through the principal dealer’s network

and if there are insufficient funds, the transactions shall be put on normal queue and priority queue for non RENTAS members as well as RENTAS members respectively.

• In the event that the subscribers fail to settle the allotment proceeds on the issue date, the allotment transaction shall be deemed and compensations are to be applied accordingly.



Cont…..• The pending allotment transaction in the priority queue

shall be cancelled, and for the normal queue, the lead arranger shall instruct the subscriber to cancel the allotment transaction in the payment queue from the subscriber’s front end system.

• The securities shall not be aborted and downsizing is not allowed on the issue date

• Also applies to unsettled allotted securities which are not underwritten as well.

• Except for the existing IPDS issues which shall continue to follow the formula stated in the trust deed, the formula for scripless IPDS issues shall be guided by these Rules. The proceeds formula for dividend bearing IPDS are where the secondary notes are created is as follows :



Cont… Proceeds = FV x P/100

FV = Face value or nominal amount of bonds

P = price of bonds per RM100

The proceeds formula for dividend bearing IPDS where

the secondary notes are not created is as follows:

Proceeds = Principal + Accrued dividend

= FV x P + FV (c x t)

100 365



Cont…

• Where,• FV=face value or nominal amount of bonds• P = price of bonds per RM 100 • C = dividend rate per cent per annum (5 decimal places)

t= number of days from the last dividend date to the settlement date

The formula for the calculation of the dividend/accrued dividend, where the secondary notes are not created,

Dividend = FV ( c x t )

365



Cont…

• FV= face value or nominal amount of bonds• c = dividend rate in per cent per annum ( 5

decimal places)• t =number of days from the last dividend date to

the settlement/next dividend date

*Note: in a leap year, t would still be calculated

from the last coupon/dividend date to the next

coupon/dividend payment date



(a) In the event of an expected holiday, the dividend payment date shall be the next business day, if the latter falls within the same month. If the next business day falls into the next month, the dividend payment date shall be the preceding business day in the current month.

(b)For redemption (including the last dividend date), if it falls on an expected holiday, the proceeds shall be paid on the preceding business day.

(c)For an unexpected holiday, the dividend payment date and redemption date shall be the next business day, irrespective of whether it falls into the next month or not.

(d) For any adjustment of payment date, the dividend shall be adjusted accordingly (if applicable)



Cont…• Therefore, for transactions which do not use the delivery

versus payment system the settlement shall be agreed mutually between the sellers and buyers, and any claims for non delivery or late delivery will have to be settled by the parties concerned outside the RENTAS system.

• The delay or failure to settle a securities transaction within the stipulated cut-off tome may result in a breach of BNM’s regulatory requirement.

• If the settlement was delayed but completed on the value date, the formula would be similar if the settlement failed to settle on the value date, the seller will have to hold the securities until the settlement is completed



Cont…• The seller should therefore recalculate the proceeds if this was Islamic securities

to reflect the additional holding period. In this case, the calculation of compensation shall be as follows:

Compensation Claim Amount = Amount x (IRR + R %) x Day

36500

Where,

Amount = the amount due for the settlement of the transaction.

IRR = shall be the Islamic Average Weighted Rate of the industry computed by BNM for the penalty arising from the cheques clearing differences between banks participating in the SPICK.

Day = this delay will be deemed as 1 day for interest calculation.

R = reserve cost (where applicable) R is currently fixed at 1% and is subjected to review



4.8 Fully Automated System For Issuing/ Tendering (FAST)

• Paragraph 23 of the Guidelines provides that unless a listing is sought on any Malaysian stock exchange, all issues of PDS are to be reported or tendered on the Fully Automated System for Issuing/Tendering (FAST) (see “Rules on Fully Automated system for Issuing/Tendering (FAST)).

• It provides a uniform set of procedures and practices to govern the primary issuance/tendering of all instruments captured under FAST.

• FAST will be only entering point for creation of instruments approved or specified by BNM. Securities approved by BNM and captured under FAST include PDS and IPDS.



Cont…• Membership is open to all eligible investors as approved by

BNM and any approved authorities

• An organization is deemed to be a member if it has purchased FAST workstations. Organisations intending to subscribe FAST workstation must obtain the prior approval of BNM by submitting a written application to Pengarah, Jabatan Pengawalan Bank, BNM.

• It is the responsibility of FAST members to ensure that their workstations are protected from unauthorized use, fraud limited access given and any loss incurred. They are not even allowed to make any modifications, alterations or additions to the hardware and software without the prior approval of BNM



According to Article 4.1 of the FAST rules,the benefits of FAST are as follows

(a) An online system without any downloading procedure.

(b) One system to capture all issuance of instruments regardless of the mode of issue.

(c)For tendered instruments, FAST provides standardization in tendering procedures in terms of bid submission tender processing and announcement of results.

(d) For non-tendered instruments. FAST enables the creation of facility and stock to be uniquely identified by certain codes of reference.

(e)Provides certain interface functions to Bond Information and Dissemination System and RENTAS



Cont..• Here are examples of IPDS securities which are

captured under FAST are Khazanah bonds issued under the principle of Mudharabah, Islamic Notes Mudharabah, Sanadat Mudharabah Cagamas and Islamic Commercial papers.

• If one needs to issue Islamic Commercial papers, it would be tendered on the exact purchase price basis expressed to the nearest sen and the price per/100 will be calculated.

Purchase Price = SP ( 1- ( r x t)

36500



Cont..• Where, • SP = selling price being the face value/nominal value• r = the applicable yield/rate expected (in percent per

annum)• t= the number of days in the tenor of the papers

9which shall include the issue date but shall exclude the maturity date)

Hence, bidders may use this formula for computation of exact purchase price. Purchase price must be rounded to the nearest two decimal places when submitting the tender



Cont…• Under the issuance of IPDS, only licensed merchant

banks, commercial banks and discount houses who are FAST members and RENTAS members are allowed to lead manage and facilitate facilities under IPDS.

• In the event that the issues are under subscribed, i.e when the total tender amount submitted by bidders is less than the issue amount or when the tender panel members bid higher/lower than the underwritten price respectively, the underwriters are obligated to take up the unsubscribed amount or the amount of the bids by the tender panel member which rate is higher than the underwritten yield or price which was lower than the underwritten price.



4.9 Rules on Bond Information and Dissemination System (BIDS)

• The BIDS Rules shall be effective from October 1, 2001. These Rules are applicable to all members for all dealings in instruments and any other obligations with respect to BIDS.

• Of the instruments which are covered by BIDS would be IPDS as well.

• Membership is open to financial institutions licensed under the BAFIA and any other persons approved by BNM



5.0 Conclusion • The principle goal of establishing Islamic capital market

is to channel savings into long-term productive investments.

• Banks with strong capital could mitigate the possibility of bank failure when they are required to perform provisioning exercise.

• In Malaysia, the Securities Commission (SC) assumes a vital and leading role for formulating screening guidelines which are applied to all listed companies to determine their halal status.



6.0 Reference

Associate Professor Dr. Che Zuina Binti Ismail, (2012), Islamic Legal Framework,

MARA University of Technology: Centre For

Islamic Thought and Understanding.



Thank you…^_^


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