LEGAL DOCUMENTATION FOR

SUKUK STRUCTUREBy: Camille Silla PaldiCEO of FAAIF

RIGHTS TO UNDERLYING ASSET AND CASHFLOWSukuk represents ownership of assets, its usufruct or services (the underlying asset), the claim embodied in the sukuk is not just a claim on the underlying asset used in the sukuk transaction, but also the right to the cashflow and proceeds from the sale of the asset.

In ijarah sukuk, the sukuk is akin to trust certificates establishing undivided ownership of the leased asset and the right to the cashflow arising from it.

RIGHTS TO CASHFLOW FROM CONTRACT OF EXCHANGE In the case of a sukuk issued as evidence of indebtedness arising from the sale of asset-based on contracts of exchange other than ijarah, such as those originating from murabahah and istisna’a, the claim is on the obligations stemming from the applied contract of exchange and not ownership of the physical asset, as ownership has been transferred to the obligor.

RIGHT TO UNDIVIDED INTEREST IN SPECIFIC INVESTMENT In the case of special investment activities funded through musharakah and mudarabah, the sukuk represent the holders’ undivided interest in the specific investments.

Musharakah Sukuk is used to raise funds for projects on the basis of partnership contracts.

The sukuk musharakah holders or investors then become the owners of the project, in proportion to their respective shares.

Profits are distributed according to a pre-agreed proportion, while losses are pro-rated according to their equity share.

RIGHT TO UNDIVIDED INTEREST IN SPECIFIC INVESTMENT Each mudharabah sukuk holder or investor, on the other hand, holds equal value in the mudharabah equity.

Profits will be shared on a pre-agreed ratio between the mudharabah investors and the sukuk shared equally among the mudharabah investors.

EQUITY BASED SUKUK

Equity sukuk are based on contracts of partnership, which allows two or more parties to develop wealth by sharing both risks and returns (Musharakah and Mudharabah).

Musharakah (Pooling of capital resources among several parties based on pre-agreed proportions of profit distributions and losses borne according to equity contributions).

Mudharabah (Contract between fund owner and entrepreneur whereby returns are pre-agreed based on profit achievements, but losses borne just by capital provider. Entrepreneur only provides management expertise.

EQUITY BASED SUKUK

The equity-based sukuk structures do not represent direct ownership rights in tangible assets, instead it represents ownership rights in the outcome of partnership ventures i.e. assets of particular projects or special investment activities.

In legal terms, a share in underlying tangible assets, which is the foundation of the partnership model.

Hence, shares in partnership are regarded as assets, which are then securitized through a sukuk issuance.

DEBT BASED SUKUK

Sukuk can be structured on a debt structured model, which is based on the contracts of exchange.

These exchange contracts are sales contracts, which allow the transfer of a commodity for another commodity on the transfer of a commodity for money following Islamic principles.

Debt based sukuk’s underlying asset is securitizing of Islamic receivables, which are generated from IF contracts such as murabahah, ijarah, istisna’a etc.

Murabahah, Bai Bithamin Ajil, Bai al Istisna’a, Bai al Salam, Al Ijarah.

SUKUK

Subscription Agreement:

The master agreement, which provides an overview of the facility as it highlights the agreements executed, security granted, and the description of the parties.

COMMON TERMS

Availability period

Purpose and Facility Description

Agreement to Subscribe

Payment by Primary Subscribers

Utilization of Proceeds

Conditions Precedent to Availability of Sukuk

Security

COMMON TERMS

Issue and Redemption of the Sukuk

Representations and Warranties

Events of Default/Dissolution Events

Governing Law

TRUST DEED

This agreement sets out the terms of the trust by the trustee for the benefit of the investors/sukuk holders.

The main role of the trustee is to act on behalf of and for the interest of investors i.e. to declare an event of default/dissolution even.

COMMON TERMS IN TRUST DEED Face amount, status of the sukuk, trading and redemption of the sukuk;

Payment – redemption, manner of payment, compensation;

Form of Sukuk – Series, Global certificates, exchange for definitive sukuk, denomination and form of definitive sukuk, title, and ownership of sukuk;

Covenant to pay face amount of sukuk;

Cancellation of sukuk and records.

DEPOSITORY AND PAYING AGENCY AGREEMENT This agreement allows issuer to appoint an agent for the purpose of issuing or registering and lodging securities into the agency and for automating the payment of profit and maturity proceeds.

The depository shall hold the Global Certificates in its custody for and on behalf of the trustee and the investors until the maturity date.

Provides for the appointment of the depository and paying agent, obligation of the issuer and trustee, obligation of the depository with regards to payment of profit, payment of principal amount, trading of certificates, etc.

IJARAH/ASSET LEASE AGREEMENT Under the Ijarah/Asset Lease Agreement, the investors lease the asset to the preceding owner/other party/issuer (lessee).

This agreement will set out inter alia the lease period and rental payment structure.

The Asset Purchase Agreement must be executed prior to the Lease Agreement.

Investors must have ownership of the asset throughout the tenure of the sukuk in order to be entitled to lease its usufruct to the lessee.

COMMON TERMS OF IJARAH/ASSET LEASE AGREEMENT Rental period, rental amount and payments;

Sublease of Ijarah Assets;

Termination of Ijarah (expiry/events of defaults/dissolution events);

Representation and Warranties, Covenants.

SERVICING/MANAGEMENT AGREEMENT (IJARAH SUKUK) This agreement is between Lessor (investors) and Asset Manager (usually lessee or third party) to manage the Ijarah asset.

Lessor would delegate its duties as owner in respect of management and maintenance of Ijarah asset to the Asset Manager, who will act on behalf of the Lessor.

COMMON TERMS FOR SERVICING/MANAGEMENT AGREEMENT (IJARAH SUKUK) Rental period, rental amount, and rental payments.

Sublease of Ijarah Assets

Termination of Ijarah

Representations and Warranties

Covenants

SERVICING/MANAGEMENT AGREEMENT (IJARAH SUKUK)

Between Lessor (Investors) and Asset Manager (Lessee or Third Party).

Lessor to delegate its duties as owner in respect of management and maintenance of Ijarah assets to the Asset Manager, who acts on behalf of the Lessor.

COMMON TERMS OF MANAGEMENT AGREEMENT (IJARAH SUKUK) Appointment and fees for Asset Manager

Scope of management of Ijarah Assets

Duties in relation to subscribing to Takaful/Insurance for Ijarah Asset

Expenses in relation to management of Ijarah Assets

SALE AND PURCHASE UNDERTAKING The issuer will provide an undertaking to purchase the Ijarah Asset from the investors when specified events occur in accordance with the pricing stipulated in the purchase undertaking.

The investors will provide an undertaking to sell the Ijarah Asset to the issuer upon the happening of specified events in accordance with the pricing as stipulated in the sale undertaking.

COMMON TERMS FOR SALE AND PURCHASE UNDERTAKING Specified events for application/exercise of undertaking, pricing of Ijarah Asset (exercise price);

Manner of application/exercise of undertaking for: Exercise Notice; Execution of Sale/Purchase Agreement; Time for Payment of Exercise Price.

MUSHARAKAH SUKUK AGREEMENT Partnership agreement between investors.

COMMON TERMS OF MUSHARAKAH AGREEMENT Specification of musharakah venture;

Contribution of capital by investors to musharakah;

Appointment of manager for musharakah venture;

Provisions for profit and loss sharing;

Provision for profit distribution of excess profit above an expected profit margin;

Dissolution of musharakah;

Duties in relation to taking up takaful/insurance for Ijarah Asset;

Expenses in relation to management of Ijarah Assets.

MUSHARAKAH MANAGEMENT AGREEMENT Entered into separately between the investors and manager of the Musharakah Agreement;

COMMON TERMS OF THE MUSHARAKAH AGREEMENT Appointment of Musharakah manager;

Scope of management of Musharakah venture include: Receive capital contribution; Apply funds for musharakah venture; Acquire assets relating to musharakah venture; Remuneration of Musharakah Manager: fixed fees, incentive fees. Term and duration of management.

PURCHASE UNDERTAKING (MUSHARAKAH SUKUK) The issuer may provide an undertaking to purchase the asset of the musharakah venture from the investors upon the happening of specified events in accordance with the agreed price as stipulated in the Purchase Undertaking.

COMMON TERMS OF PURCHASE UNDERTAKING (MUSHARAKAH SUKUK) Specified events for application/exercise of undertaking, pricing of Musharakah Asset (exercise price);

Manner of Application/Exercise of Undertaking: Exercise Notice; Execution of Sale/Purchase Agreement; Time for Payment of Exercise Price.

DOCUMENTATION REQUIRED FOR MUDARABAH SUKUK Mudarabah Agreement: It is similar to the Musharakah Agreement, however, loss is borne by rabbul mal (Investor) and not according to capital contribution of the partners.

Purchase Undertaking: It is generally similar, including pricing issues as per an AAOIFI Shari’ah Board Pronouncement;

Management Agreement: This may be included, though for mudarib (entrepreneur) who is manager, no fee is payable (only share profits).

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