The revised guidelines are effectively a continuum of a series of legal and regulatory developments in this space in Malaysia over the last year or so (usually the sign of a proactive regulator), starting with the passing of the Capital Markets and Services Act 2007 (Amended) 2010 and which came into effect at the beginning of 2011; and the Capital Market Master Plan 2 (CMP2), which came into effect in April earlier this year, and which outlines the road map, the strategies and agenda for the development and regulation of the Malaysian capital market for the next decade.
Indeed, according to a statement by the SC, the latest revised guidelines are also "in line with the broader objectives of the CMP2 which seeks to achieve higher levels of operational efficiency, enhanced standards for fair and ethical business practices and strengthen internal controls for business conduct and risk management."
It is no secret that Malaysia would like to see the two major centers of Islamic finance - the Middle East and Asia, to spearhead its development to the next level. Zarinah Anwar, the chairman of the Securities Commission of Malaysia, at a recent conference in Singapore in fact called on Middle Eastern and Asian countries to spearhead the further expansion of Islamic finance, which in the process would also deepen business and investment linkages between the two regions.
"It would seem logical to enhance the cross-border connectivity of Islamic finance by involving two regions that are already adopting it on a significant scale. This appears consistent with recent World Bank work, which found that the corridor approach of agglomeration of economic activities is effective in enhancing growth. By focusing on clusters of economic activities, scale is achieved to build competitiveness and deepen business ties," she maintained.
At the same time, capital investments among countries in the two regions can be enhanced by the availability of Shariah-compliant structures (such as sukuk) to deepen and broaden the capital markets in this cluster which can then serve as a model for similar clusters to develop within other regions as well as across regions, she added.
The revised sukuk guidelines cover several important areas in the sukuk process. These include:
a) Streamlining the approval process and time-to-market for the issuance of corporate bonds and sukuk;
b) Expanding the deemed approval process to a wider scope of highly-rated issuers from within and outside Malaysia;
c) Allowing revision to terms and conditions without prior approval from the SC upon complying with a set of transparent requirements;
d) Removing mandatory rating requirement for selected issues or offers;
e) Enabling the issuance and documentation standards for domestic sukuk issues to be comparable with international best practices;
f) Enhancing the effective role and responsibilities of key transaction parties, namely principal adviser, advisers, credit rating agencies and sukuk trustees for the benefit of sukuk holders;
g) Facilitating a more informed investment decision-making process with additional provisions to ensure greater disclosure of relevant information to investors;
h) Providing greater clarity on the application of Shariah rulings and principles endorsed by the SC's Shariah Advisory Council in relation to sukuk transactions;
i) Improves disclosure standards and protection for sukuk holders through the revised trust deed guidelines.
The revised sukuk guidelines and trust deed guidelines, according to the SC, will supersede the guidelines on the offering of Islamic securities, guidelines on the minimum contents requirements for trust deeds and all the related practice notes respectively.
The SC stresses that under the guidelines, it is adopting a disclosure-based regulatory approach on the issue, offer or invitation of sukuk, for which an approval from the commission will be granted subject to the meeting of the relevant provisions.
The guidelines set out in full the relevant Shariah rulings and principles to be complied with by all issuances of ringgit-denominated sukuk and as endorsed by the Shariah Advisory Council (SAC) of the commission. In the case of a ringgit-denominated issuance which do not comply with the above Shariah and issuing principles, the advice or ruling of the SAC must be obtained through the SC prior to any submission of declarations and information under these guidelines.
The guidelines are also very specific about naming of sukuk issuances to pre-empt confusion in the market. The naming of sukuk "shall not be misleading" and must be based on the following principles: where the sukuk is structured using a single Shariah principle, the sukuk shall be named according to the underlying Shariah contract. For example, sukuk which are issued under the Musharakah principle shall be named Sukuk Musharakah; or where the sukuk is structured using multiple Shariah principles, the sukuk shall be named according to the name of the issuer or obligor (where applicable); Sukuk istithmar (investment); or any other names based on principles or concepts endorsed by the SAC from time to time, where appropriate.
The multiple Shariah principles applied shall be disclosed in the body of the relevant transaction documents and offering documents.
Malaysia, says the commission, is currently the largest sukuk market in the world, accounting for about 65 percent of the global issues. The hope is that the revised Guidelines will help Malaysia maintain its leading position by continuously attracting both local and international issuers and investors into the corporate bond and sukuk markets.
The latest statistics underpin the strong support which the Malaysian government and the SC have afforded the development of the ICM over the last few years. The 2010 SC annual report confirmed that the size of the ICM in Malaysia exceeded RM1,074.1 billion at the end of 2010, thus breaking the RM1 trillion barrier for the first time. At the same time the ICM recorded an impressive growth of 15.2 percent in fiscal year 2010. In fact, the ICM is now growing at a rate equal if not faster than the conventional capital market.
The ICM totaled RM1.07 trillion at the end of 2010, slightly lower than the conventional capital market which reached RM1.19 trillion for the same period. The ICM comprised RM756.1 billion in Islamic equities (mainly mutual funds); RM294 billion in sukuk issuances; and RM24 billion in Islamic unit trusts. This compared with RM519.2 billion for conventional equities; RM464.7 billion for conventional bonds; and RM202.8 billion for conventional unit trusts.
Fund-raising through Shariah-compliant instruments, according to the SC, continued to retain its popularity. The commission approved 21 sukuk issues with a value of RM40.3 billion; which accounted for 63.4 percent of total bond approvals in value in 2010. The Sukuk Musharakah represented RM16.7 billion or 42.1 percent of total sukuk approvals, which also underlines the wider cross-border evolution of the Malaysian ICM because asset-backed and asset-based sukuk originations have greater universal acceptance and appeal.
The global sukuk market this year thus far is estimated at $47 billion, with sovereign and corporate Malaysia setting the trend. Only two weeks sovereign Malaysia successfully closed a dual tranche $2 billion Wakala (agency) sukuk issued by the Wakala Global Sukuk Berhad on behalf of the Malaysian government. This is the third international sovereign sukuk issued by Malaysia and augurs well for the Malaysian market where a historical yield curve for sovereign sukuk is fast emerging. Malaysia is the only country in the world to have issued three international sovereign sukuk.
