SECP Amends rules to reduce cost of issue to develop Islamic Capital Market

Securities Exchange Commission of Pakistan has decided to amend rules pertaining to issuance of Sukuk, reducing the cost of issue and easing the regulatory burden to develop Islamic capital market.

The proposed amendments include waiving mandatory underwriting where the purpose of the issue is to repay its existing debts, reducing the minimum number of underwriters from two to one, specifying the fit and proper standards for a Sharia Advisor and essential elements of a Sharia pronouncement, disclosing expenses specific to Sharia compliance and audit, emphasizing issuance of sukuk using the SPV structure, and aligning the definition of sukuk with the definition given by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
 
These amendments were initiated by the SECP following the discussion in the Islamic Capital Market Subcommittee, chaired by Zafar Hijazi, SECP Chairman. This committee, together with three other committees on awareness, policymaking, and taxation, is working on developing Islamic finance in Pakistan.

Based on the recommendation of the Islamic Capital Market Subcommittee, the SECP organized a detailed consultation session with Sukuk issuers and intermediaries, leading to these amendments. Representatives of State Bank of Pakistan (SBP) and Pakistan Stock Exchange (PSX) also participated in this discussion session, which was held in Karachi in February 2017.
 
The SECP has also advised PSX to submit proposals to reduce the cost of market maker for sukuk, rationalize the minimum size of public offer portion to reduce the cost of issue, and organize a seminar with potential issuers to widen awareness regarding sukuk. These measures shall further facilities the issuers, reducing their cost and hassle.
 
In Pakistan, sukuk market has been performing below its potential, while demand is substantial, supply remains short. Sukuk are issued as a Sharia-compliant instrument under the Sukuk Regulations read with Section 120 of the 1984 Companies Ordinance, through public offer and private placements. The sukuk issued through public offerings are subsequently listed on the PSX for trading and quotation of their market prices. Major investors in sukuk include mutual and pension funds, banks, commercial banks, NBFCs, retail individual investors. All members of the public now have the opportunity to comment on the proposed amendments to the Sukuk Regulations before these are finalized.