DMD Circular No. 05: Guidelines on Sukuk Issue and Management under Shariah Based Investment Contract

50119

Bangladesh Bank (Central Bank of Bangladesh) Head Office Motijheel, Dhaka-1000 Bangladesh.

Data Management Department

05 Kartik, 1427 Bang Date: ------------------- 21 October, 2020 Eng

DMD Circular No.-05

Managing Director/Chief Executive All Scheduled Banks and Financial Institutions operating in Bangladesh

Dear Sir,

Reference: Guidelines on the Issue and Management of Sukuk by the Government under Shariah Based Investment Contract.

Through letter No. 07.00.0000.137.35.001.20.2 dated 08 October, 2020 of the Ministry of Finance, the Notification regarding Guidelines on the Issue and Management of Sukuk by the Government under Shariah Based Investment Contract has been issued, which is being sent herewith for your information and necessary action.

Yours faithfully,

(Rup Ratan Pine) Manager Phone: 9530131 E-mail: rupratan.pine@bb.org.bd

Enclosure: As described.

Phone: 88-02-9550448, 9554896, IP: 88-02-55665001-6, Fax: 88-02-9530479, www.bb.org.bd

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Government of the People's Republic of Bangladesh Ministry of Finance, Finance Division Treasury and Debt Management Sub-division Internal Debt Management-2 Branch www.mof.gov.bd

23 Ashwin 1427 Date: ------------------- 08 October 2020

No: 07.00.0000.137.35.001.20.2

Notification

Subject: Guidelines on the Issue and Management of Sukuk by the Government under Shariah Based Investment Contract.

Whereas, it is appropriate and necessary to expand and facilitate the path of Shariah-based financing in the ongoing development programs of the country,

Therefore, the following guidelines are formulated for the purpose of issuing Sukuk by the Government under Shariah Based Investment Contract:-

1. Short Title, Application and Commencement-(1) These guidelines shall be known as 'Bangladesh Government Investment Sukuk, 2020'.

(2) These rules shall apply to:-

(a) The issuance of Bangladesh Government Investment Sukuk in a Shariah-compliant manner for relevant matters;

(b) Individuals and institutions who are suitable buyers and holders of "Bangladesh Government Investment Sukuk", their legal heirs or nominated persons;

(c) Bangladesh Bank, all scheduled banks and financial institutions operating in Bangladesh;

(d) Other institutions associated with the Sukuk issuance activity; and

(e) These rules shall come into force immediately.

2. Definitions- Unless the subject or context otherwise requires, in these guidelines:-

(1) "Operational Directives" means the directives issued by Bangladesh Bank or Special Purpose Vehicle (SPV) for the proper management of Sukuk issuance, accounting and related activities;

(2) "Originator" means the Government of the People's Republic of Bangladesh, which is the proposer of the Sukuk issuance or proposal under Shariah policy;

(3) "Financial Institution" means 'Financial Institution' as defined in Section 2 of the Financial Institutions Act, 1993 (Act No. 27 of 1993);

(4) "Investment Dealer" means a Shariah-compliant bank, financial institution or any other institution nominated by the SPV for the purpose of subscribing (subscribe) and underwriting Sukuk in auction;

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(5) "Investment Portfolio Securities or IPS" means another account where the accounting of Sukuk for investors other than Investment Dealers, banks and financial institutions will be kept;

(6) "Issue" means Sukuk issuance under any investment contract according to Shariah policy;

(7) "Issuer" means the SPV appointed in the case of Sukuk issuance against a specific asset or project;

(8) "Bangladesh Bank" means the central bank established under the Bangladesh Bank Order, 1972 (President’s Order No.127 of 1972);

(9) "Bangladesh Government Investment Sukuk" (hereinafter referred to as "Sukuk") means undivided ownership or partnership (share) indicating such approved assets of equal value which are purchased in the future or have already been purchased for the purpose of earning profit through purchase and sale, under a specific Shariah-compliant investment contract, on the existing assets (tangible assets, usufruct and services) of a specific project or special investment or any service, or/and on assets that will be included under the contract through future production or preparation, or/and on any Shariah-compliant product item;

(10) "Bangladesh Government Investment Sukuk Account" means the Sukuk account kept with Bangladesh Bank for keeping records of Sukuk issuance, maintenance and maturity;

(11) "Bank" means Banking Company as defined in Section 5 of the Bank Companies Act, 1991 (Act No. 14 of 1991);

(12) "Investment Contract" means any Shariah-compliant contract, transaction or scheme under which any person or institution will invest agreeing to accept profit or loss;

(13) "Trustee" means the institution responsible for protecting the interests of Sukuk holders, supervising the activities of the SPV and providing security for the documents and guarantees described in the prospectus according to the contract entered into with the Originator;

(14) "Prospectus" means documents enriched with necessary information for the issuance of Sukuk;

(15) "Profit" means any type of income derived from Sukuk which can be positive or negative;

(16) "Shariah" means Islamic laws and regulations described in the Holy Quran, Sunnah, Ijma or Qiyas;

(17) "Shariah Advisory Committee" means the committee formed by Bangladesh Bank for providing any opinion or advice on Shariah matters in the case of Sukuk or Islamic Security issuance;

(18) "Shariah Concepts" means Shariah-approved special methods, including those issued by "Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)", where Ijara, Mudarabah, Musharakah, Murabaha, Istisna and other Shariah-approved investment methods are included;

(19) "Shut period" means the period during which Sukuk transactions, transfer or settlement will be suspended;

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(20) "Sukuk Auction Committee" means the committee formed for the purpose of issuing and distributing Bangladesh Government Investment Sukuk;

(21) "Sukuk Investor Identification or SIID" means the independent account of the investor operated under the Subsidiary General Ledger or Investment Portfolio Security account with Bangladesh Bank;

(22) "Sukuk Proceeds" means the funds that the SPV will raise through Sukuk issuance;

(23) "Sukuk Holder" means the person or institution investing in Sukuk who is legally entitled to the ownership of the Sukuk;

(24) "Sukuk Asset" means the Shariah-compliant real asset or its use or service approved by the Shariah Advisory Committee;

(25) "Government" means the Government of the People's Republic of Bangladesh;

(26) "Subsidiary General Ledger or SGL" means the Sukuk account kept with Bangladesh Bank by banks and financial institutions;

(27) "System" means the electronic system or platform operated by Bangladesh Bank to conduct all activities including Sukuk issuance activity and post-issuance Sukuk registration;

(28) "Special Purpose Vehicle or SPV" means the legal entity appointed by the government or established for the purpose of issuing Sukuk; and

(29) Words and expressions not defined in this section shall be determined by the Public Debt Act, 1944 and Public Debt Rules, 1946.

3. Formation of Shariah Advisory Committee and its duties and responsibilities.- Bangladesh Bank shall form the Shariah Advisory Committee comprising members from the Finance Division and Shariah experts who have appropriate experience and knowledge of Fiqh al-Muamalat (Islamic Commercial Law), business and financial services. The term and number of members of the said committee shall be determined by Bangladesh Bank from time to time. This committee shall perform the following duties:

(a) Provide Shariah-based opinion on the subject of Sukuk assets for Sukuk issuance according to the government's proposal;

(b) Advise on determining the nature (mode of investment) of the investment contract according to Shariah policy for the purpose of Sukuk issuance;

(c) Provide opinion on documents related to Sukuk issuance, execution of contracts, etc.;

(d) Advise on the prospectus applicable for Sukuk issuance; and

(e) Provide appropriate opinion by applying Ijtihad (reasoning) following the applicable Shariah policy in the case of Sukuk issuance.

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4. Role and responsibilities of Special Purpose Vehicle and Trustee.- (1) The government may appoint Bangladesh Bank or any other institution as Special Purpose Vehicle and/or Trustee for the purpose of Sukuk issuance. The appointed institution or institutions shall enter into a contract with the government to perform the duties of Special Purpose Vehicle and Trustee.

(2) For the purpose of conducting Sukuk activities, the Special Purpose Vehicle shall perform the following duties:

(a) Present the proposal received from the Finance Division for the purpose of Sukuk issuance to the Shariah Advisory Committee by correctly following Shariah policy;

(b) Send to the Finance Division for necessary action to obtain the opinion or advice of the Shariah Advisory Committee on the proposed Sukuk;

(c) Perform necessary activities for Sukuk issuance including publishing the prospectus according to the Sukuk proposal approved by the Finance Division and the executed contract;

(d) Conduct all accounting including depositing Sukuk proceeds into the government account, paying profit to investors and paying principal at maturity, including arranging Sukuk auction or private placement.

(3) The Trustee shall play the following role to ensure the rights of Sukuk holders and compliance with contract terms at various stages of the Sukuk activity:

(a) The Trustee shall be responsible for protecting the interests and rights of Sukuk holders according to the contract;

(b) The Trustee shall ensure from the Finance Division that the necessary administrative and monitoring activities regarding the use of Sukuk assets are conducted correctly and professionally; and

(c) The Trustee may take necessary measures in a Shariah-compliant manner to mitigate the risk of Sukuk holders or reduce loss; and

(d) In the event of failure in managing Sukuk assets or damage to Sukuk assets, or if there is a threat to the legal interests of Sukuk holders, the Trustee may settle the Sukuk assets under the existing legal framework of the government.

5. Duties and responsibilities of the Originator in the case of Sukuk issuance.- (1) Sukuk shall be issued in Bangladeshi Taka as internal debt, and in the case of Sukuk issuance, the Finance Division shall work as the Originator on behalf of the government.

(2) The Originator shall propose the Sukuk issuance to the SPV by ensuring the following activities:

(a) Specify the underlying Sukuk asset, determine the value and potential income of the said asset, and send the Sukuk proposal to the SPV for the purpose of obtaining advice from the Shariah Advisory Committee;

(b) Specify the Sukuk asset and inform the relevant Ministry/Department/Office associated with the said asset; and

(c) Include information such as the amount and term of Sukuk issuance in the Sukuk proposal for each Sukuk issuance.

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(3) According to the advice of the Shariah Advisory Committee, the Originator shall enter into a contract with the SPV for the purpose of Sukuk issuance and arrange to transfer the Sukuk asset or the right (Right) of income derived from it to the SPV according to the contract by following the appropriate process;

(4) The Originator may invest the Sukuk proceeds according to the method declared in the prospectus; and

(5) The Originator shall inform the SPV and Trustee about the Sukuk asset, its value and other related information.

6. Eligibility for investment in Sukuk.- (1) Any resident or non-resident person or institution shall be considered eligible to purchase Sukuk:

Provided that, they shall agree to accept profit or loss (if any) according to the conditions mentioned in the prospectus.

(2) Non-resident persons or institutional investors may invest through their Non-Resident Foreign Currency Deposit Account or Non-Resident Investor’s Taka Account operated in any bank operating in Bangladesh. Profit and proceeds or principal received at maturity shall be considered repatriable in foreign currency (after deducting all applicable fees and/or taxes).

7. Ownership of Sukuk in case of investor's death.- (1) In the case of investing in Sukuk, one or more persons may be appointed as nominee in the application form at the time of opening SIID.

(2) The Sukuk holder may change his nominee and the extent of entitlement at any time through written application.

(3) If no nominee is appointed, the successor of the deceased person shall get legal ownership of the Sukuk.

8. Primary Issue Process of Sukuk.- (1) The SPV shall issue Sukuk at the indicated price through private placement or auction according to the prospectus.

(2) Banks and financial institutions including Investment Dealers may submit bids for themselves in the Sukuk auction.

(3) Other persons and institutional investors shall complete all related activities including submitting bids in the Sukuk auction through Investment Dealer, bank or financial institution.

(4) Bids shall be submitted at the indicated price in multiples of 10,000/- (Ten Thousand) Taka in the Sukuk auction. The bank or financial institution submitting the bid shall ensure sufficient balance in the Al-Wadiah/Current account kept with Bangladesh Bank for the settlement of Sukuk purchase for itself and on behalf of customers.

(5) Fund and securities settlement shall be completed against the accepted bids on the next working day (T+1) after the Sukuk auction takes place.

(6) On the next working day after the Sukuk auction, the Al-Wadiah/Current account of the relevant bank or institution kept with Bangladesh Bank shall be debited to the investors against the Sukuk issuance, and the account of the SPV shall be credited, and the received amount shall be credited to the government's account by debiting the SPV's account kept with Bangladesh Bank on the same working day.

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(7) The SPV may impose a maximum limit on a single bid based on SIID in any auction.

(8) The Sukuk Auction Committee may accept bids for an amount reduced from the announced amount (if necessary) or reject the entire auction.

9. Re-issue or Shelf Issue method of Sukuk.- (1) According to the prospectus, the SPV may re-issue (Re-issue) or shelf issue (Shelf Issue) Sukuk from time to time through auction or private placement, which shall be informed to the relevant parties in the appropriate process.

(2) According to the prospectus, the maturity date, profit payment date and profit rate of the re-issued Sukuk shall be determined.

(3) Other rules and regulations applicable to the primary auction shall be applicable in the case of Sukuk re-issue or shelf issue.

10. Other features of Sukuk.- (1) Bids submitted in Sukuk auction or private placement shall be considered as the investor's proposal and, if accepted by the auction committee, shall be considered as an investment contract according to the prospectus.

(2) If mentioned in the prospectus, Sukuk purchased through auction or private placement can be freely bought and sold in the secondary market;

(3) According to the conditions described in the prospectus, the profit of each Sukuk shall be payable quarterly, semi-annually or annually and the value of the Sukuk shall be payable at maturity;

(4) Sukuk shall be issued as dematerialized (demat) or electronic format registered certificate and shall be kept in the SGL or IPS account in the system of Bangladesh Bank;

(5) Tax shall be applicable on the profit of Sukuk according to the prevailing Income Tax Act and rules;

(6) Sukuk held by banks and financial institutions in their own account shall be considered as approved security for maintaining Statutory Liquidity Ratio (SLR) according to the Bank Companies Act, 1991;

(7) The government may impose unspecified features in any new issuance and the prospectus containing such features shall be published with the consent of the Shariah Advisory Committee.

11. Secondary Trading Method of Sukuk.- (1) Both resident and non-resident investors can participate in secondary purchase and sale. Secondary purchase and sale settlement and other activities shall be completed according to Operational Directives.

(2) Investment Dealers, other banks and financial institutions shall inform Bangladesh Bank and the SPV of all transactions in the secondary market according to the process described in Operational Directives;

(3) The SPV may take necessary arrangements for the listing and trading of Sukuk on any platform domestically or internationally.

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(4) Bangladesh Bank or the SPV may formulate or amend Operational Directives from time to time for the proper execution of the system's workflow. If any issue arises in the case of Sukuk trading, it shall be settled according to Operational Directives.

(5) Bangladesh Bank or the SPV may impose any kind of fee or charge according to Operational Directives for maintaining SIID account and transferring ownership of Sukuk.

12. Periodical Profit and Maturity Value Payment Method.- (1) For the purpose of paying profit to Sukuk holders, the SPV shall calculate the profit according to the method described in the prospectus and Bangladesh Bank shall ensure payment of money to the SPV's account from the government's account kept with Bangladesh Bank on the date of profit payment according to the contract. Thereafter, the SPV shall credit the Al-Wadiah/Current account of the relevant bank or financial institution kept with Bangladesh Bank by debiting its account (after deducting applicable income tax).

(2) For the purpose of paying the value of the Sukuk, Bangladesh Bank shall ensure payment of money to the SPV's account from the government's account kept with Bangladesh Bank on the maturity date according to the contract. Thereafter, the SPV shall credit the Al-Wadiah/Current account of the relevant bank or financial institution kept with Bangladesh Bank by debiting its account.

(3) The working day before the date of profit distribution and principal payment at maturity of the Sukuk shall be considered as the Shut Period.

(4) If the date of profit payment or principal payment at maturity of the Sukuk falls on a holiday, it shall be paid on the next working day.

13. Sukuk Asset Management.- (1) The Originator shall take necessary steps to transfer the Sukuk asset of the Originator to the SPV without any legal complication, fee or commission.

(2) Assets that will create cash flow, economic or social benefits for the Originator shall be declared as Sukuk assets.

(3) Sukuk assets acquired with Sukuk proceeds shall be used in the manner described in the prospectus.

(4) The Sukuk asset may be transferred or leased to the Originator by the SPV for the use of the Sukuk asset at the value and method described in the prospectus.

(5) Any change, expansion, transformation or transfer of Sukuk assets shall be reasonable from a commercial perspective and for the maximum benefit of Sukuk holders.

(6) If any damage or material change occurs to the Sukuk asset during the sukuk life cycle, it shall be informed to the SPV by the Originator.

(7) At maturity, the Sukuk asset shall be transferred to the Originator from the SPV at the value and method described in the prospectus.

14. Fees and Commission.- (1) The SPV and the Trustee for protecting the rights of the Originator and Sukuk holders for Sukuk issuance and Sukuk management shall be entitled to the fee or commission determined according to the contract entered into with the Originator. Income from such fee or commission shall be used to manage the cost of Sukuk issuance and management and to pay allowance or honorarium to the officials engaged in conducting this activity according to the rules of Bangladesh Bank for the purpose of acquiring theoretical or practical knowledge on Sukuk.

(2) The rate of fee and commission shall be received according to the contract entered into between Bangladesh Bank and the government under the Treasury Rules, 1979 (Appendix I).

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15. Restructuring and Termination of Sukuk.- Any restructuring, change or termination (termination) of Sukuk shall be carried out with the appropriate approval of the Trustee, Shariah Advisory Committee and Originator.

By Order of the President,

Signed/- 8.10.2020 Aftab Rouf Talukdar Secretary Phone: 9512201 Fax: 9576003 Email: Secretary@finance.gov.bd

23 Ashwin 1427 Date: ------------------- 08 October 2020

No: 07.00.0000.137.35.001.20.2

Copies are sent with due respect for information and necessary action (in order of seniority):

1. Secretary to the Prime Minister, Cabinet Division.
2. Principal Secretary to the Prime Minister, Office of the Prime Minister.
3. Governor, Bangladesh Bank, Bangladesh Bank Head Office, Motijheel, Dhaka.
4. Senior Secretary/Secretary................................................(All)
5. Chairman, Bangladesh Securities and Exchange Commission, Sher-e-Bangla Nagar, Dhaka.
6. Chairman, National Board of Revenue, Dhaka.
7. Deputy Director, Bangladesh Government Press, Tejgaon, Dhaka (Requesting to publish the notification in the Gazette urgently and send 50 copies to the undersigned).
8. Senior System Analyst, Finance Division, Ministry of Finance (Requesting to publish the notification on the website of the Finance Division).
9. .................................................................................................
10. Office Copy.

(Signature) 8/10/2020 Md. Ruhul Amin Deputy Secretary Internal Debt Management-2 Branch Phone: 9576028 E-mail: ruhulyn@finance.gov.bd

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