This document outlines the key legal documentation required for different sukuk structures. It discusses the rights represented by different types of sukuk, including rights to underlying assets, cash flows, and undivided interests. It then summarizes the common terms and purpose of key agreements like subscription agreements, trust deeds, and sale/purchase undertakings. Specific sukuk types like ijarah, musharakah and mudaraba are discussed in terms of their required agreements. The document provides a high-level overview of the legal frameworks for structuring different kinds of sharia-compliant sukuk instruments.

1. LEGAL DOCUMENTATION
FOR SUKUK STRUCTURE
By: Camille Silla Paldi
CEO of FAAIF

2. RIGHTS TO UNDERLYING ASSET
AND CASHFLOW
Sukuk represents ownership of assets and/pr 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 cash flow 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 cash flow
arising from it.

3. RIGHTS TO CASH FLOW FROM
CONTRACT OF EXCHANGE
In the case of a sukuk issued as evidence of indebtedness arising
from the sale of asset-based or 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. DEBT BASED SUKUK
Sukuk can be structured on a debt structured model, which is based
on the contract 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.

9. 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.

10. 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

11. COMMON TERMS
Issue and Redemption of the Sukuk
Representations and Warranties
Events of Default/Dissolution Events
Governing Law

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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

19. 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.

20. 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

21. 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.

22. 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.

23. MUSHARAKAH SUKUK AGREEMENT
Partnership agreement between investors.

24. 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.

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

26. 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.

27. 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.

28. 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.

29. 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).

30. THE END