Legal framework of islamic capital market

ISB 658
ISLAMIC FINANCIAL LEGAL FRAMEWORK

TOPIC: LEGAL FRAMEWORK OF
ISLAMIC CAPITAL MARKET

PREPARED BY:
SOLAHHIAH BINTI SHUIB
JULIANA BINTI TAJUDDIN
NUR BAISYATUL ADIELA BINTI BURHAN
WAN NUR HASYIMAH BINTI WAN HANAFI
SITI NUR NADHIRA BT MUHAMMAD NAFIZON

PREPARED FOR:
ASSOCIATE PROFESSOR DR.CHE ZUINA BT ISMAIL
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Contents
1.0 Introduction

2.0 Development of Islamic Capital Market

3.0 Islamic Capital Market Products
3.1 Fundamental of Sukuk
3.1.1 Sukuk using al-ijarah Structure
3.1.2 Sukuk using Musyarakah Structure-1
3.1.3 Structure of Sukuk Musyarakah – 2
3.1.4 Exchangeable Sukuk Structure
3.1.5 Exchangeable Sukuk Structure- Exchangeable
Mechanism
3.1.6 Sukuk using al-istisna’ Structure
3.2 Shariah Compliant Securities
3.3 Shariah-Based Unit Trust
3.4 Islamic Real Estate Investment Trust (REITs)
3.5 Islamic Exchange Traded Fund (ETF)

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4.0 Statutes and Guidelines Governing Islamic Capital Market
4.1 Securities Commision Act 1993
4.2 Guidelines on the Offering of Private Debt Securities
4.3 Guidelines on the Offering of Asset Backed Debt Securities
4.4 Guideline on the Minimum Contents of Requirements for the
Trust Deeds
4.5 Guidelines on Content of Prospectus for Debentures
4.6 Controller of Foreign Exchange
4.7 Rules on the Scripless Securities under the Real Time
Electronic Transfer of
Funds and Securities (RENTAS) System
4.8 Fully Automated System For Issuing/ Tendering (FAST)
4.9 Rules on Bond Information and Dissemination System (BIDS)

5.0 Conclusion

6.0 Reference

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1.0 Introduction

Capital market is the place where long-term financial instruments with
maturity exceeding one year are issued and traded.

The goal is to channel savings into long term productive investments.

Participant in this market consists of government and private sectors.

The financial instruments in the capital market may be categorized into
equity instruments and debt instruments.

Equity instruments are in the form of share certificates, either common
stock or preferred stock.

Debt instruments are made up of bonds which may be classed into
common bonds and convertible bonds.

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Difference between stock and bond

STOCK BOND
For a person who holds share of a On the other hand, when bonds are
company or the stock, there is no issued, the company is bound by law
guarantee that he shall receive annual to pay annual interest in accordance
dividends since the company has no with the terms made at the time of the
legal obligation to pay dividends to issuance.
shareholders.

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Continue.
.
In Malaysia, any company doing business or wishing to do
business in the country must be registered with the Companies
Commission of Malaysia under the Companies Act 1965.

The owner and the company are two separate entities.

The relationship between the owner of the company and the
company itself depends on the amount and types of shares held.

On the other hand, shareholders are not responsible for all
actions undertaken by the company.

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The difference between common stock
and preferred stock
Common stock Preferred stock

For common stock, dividends paid The payment of dividends for preferred
depend entirely on the discretion of the stock is usually in the form of fixed
Board of Directors. percentage and it takes priority over
common stock dividends.

Preferred stock consists of cumulative and non-
cumulative.

Cumulative stock refers to the continuous claim on
the dividends and any unpaid dividends will be
accumulated until the company resumes paying
them.
On the contrary, non-cumulative preferred
stockholders only receive dividend in the current
year and it does not discuss any claim on missed
dividends. Free Powerpoint Templates
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Continue
…
In the issuance and transaction of stock, the stockholder’s financial liability
is limited to the amount he has invested in the event that the business
incurs a loss.
This concept of limited liability is actually related to the mudharabah
principle in Islam.

Since a stock represent a financial claim or is a title of ownership, these
certificates do not constitute money.

Hence, the negotiation and transfer of ownership pertain only to the object
of the certificate and not the certificate itself which is regarded from the legal
point of view as a proof of the claim.

Preferred stock cannot be bought by Muslims and Islamic banks because it
is associated with pre-determined fixed rate of return which is prohibited by
Shari’ah.

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This view was researched and This means that the percentage of
reviewed by the Shariah Advisory return to preferred stockholders is
Council of the Securities Commission based on profit and not the face value
of Malaysia. of the preferred stocks.

Subsequently at every general
20th
The Council, in its meeting on 14 meeting, the common stockholders
July 1999, put forward a resolution would also commit tanazul in order to
that non-cumulative preferred shares grant dividends to preferred
be allowed by Shari’ah by applying stockholders based on the
the concept of tanazul which means percentage of net profit obtained by
to drop claims to right. the company.

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• Similar to any ordinary public offering, a prospectus
describing the financial and non-financial aspects of the
company will have to be provided to potential investors.
• Among the important information that should be stated are:

 Investors must be aware that the contract is governed by
the principle of mudharabah.
 The method of distributing returns to investors must be
clearly stated in the contract.
 The purpose of the stock issuance must be clear.

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Continue..
The ulama are of the view that for as long as no
investment has been undertaken, a stock cannot be
resold at a higher price during the period after it is
issued and bought thus it should be sold at its face
value.

Islam forbids speculation because it involves
gambling and maisir.
But the issue of speculation in the stock market has
not met with any resolution due to the difficulty in
determining its position.
Stockholders’ returns from their investment in stocks
are of two types, capital gain and dividends.

Capital gain is the profit made as a result of selling
stocks for more than the original purchase price.

Dividends, on the other hand, are the cash
distribution of earnings to the stockholder.
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Although scholars associate speculation with gambling, this view is not
reciprocated by the Shariah Advisory Council of the Securities Commision of
Malaysia.

At its 10th general meeting on 16-17 October 1997, this Council ruled that
speculation may be allowed.

Although speculation was never discussed by Muslim jurist, the bai
muzayadah principle may be associated with the practice.

In Malaysia, the Shariah Advisory Council of the SC publishes a list of
Shariah compliant stocks.

At the end of November 2008, a total of 855 Shari’ah-compliant securities
listed on the main board, second board and MESDAQ market were
approved by the Shariah Advisory Council of the Securities Commission of
Malaysia.
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This represents 85% of the total securities listed. Shari’ah-compliant
securities as defined by the Council include ordinary shares, warrants as
well as transferable subscription rights.

The three main elements that make stocks non-permissible are riba,
gambling and prohibited products or related products.

But even so, investment is permitted in activities that have tolerable level
of mixed contributions from permissible and non-permissible activities
where the non-permissible activities represent only a small percentage of
the activities and do not exceed the benchmarks established by the
Council.

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2.0 DEVELOPMENT OF ISLAMIC
CAPITAL MARKET
Since almost a decade ago when the first Islamic private debt securities (IPDS)
was issued, the ICM has developed and produced a wide range of equity
products, debt securities and managed funds.

There can be doubt that the government is intent on shaping Malaysia into a
leading international Islamic capital market centre.

Islamic private debt securities continued to be a favourite instrument among
corporate bodies for long-term financing.

Malaysia Rating Corp Bhd says that 77% of the total issues rated in 2002 (going
by value) were Islamic papers.

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Continue..

Most of the IPDS approved by the SC to date were structured based on the
principles of Bai’ Bithaman Ajil (BBA) and Murabahah. The SC had, in July
2002, informed relevant industry bodies and associations on the importance of
recognizing the SAC as the only body that can make pronouncements to the
public on any Shari’ah matters in relation to the capital market.

This was done to ensure harmonization and standardization of Shari’ah rulings
and to avoid possible divergence of Shari’ah interpretations among Shari’ah
scholars in the country.

The in-house Shari’ah advisers or committees of the members of industry
bodies or associations should provide advice and guidance on internal process
only and should not make pronouncements to the public.

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3.0 Islamic Capital Market Products

3.1 Fundamental of Sukuk
• literal meaning of sukuk is certificate
• Technically sukuk refer to securities, notes, paper or
certificates, with features of liquidity and tradability.
• The sukuk are structure based on the specific contract
of exchange of shariah compliant assets
• It is applying in the various shariah principles, such as
bai’ bithaman ajil, murabahah, ijarah, mudharabah and
musharakah that allow the investors to earn profits from
the transactions.
• is regulated by the SC through the framework provided
under the Guidelines on the Offering of Islamic
Securities.

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3.1.1) Sukuk using al-Ijarah
Structure

Sukuk holder

8) Obligator made periodic
lease payment to SPV
2) Leased asset to
obligator
9) SPV pays coupon to
investors

4) Trust certificate
1) Sell property to SPV 3) Issued trust certificate issued to investors

Obligator as Trust certificate
seller SPV issue
7) Payments 6) Payment received 5) Investor made
from investor by SPV payments

3.1.2) Sukuk using Musyarakah structure –
1

Corporate 6) Undertakes to buy
Musharakah shares of
the SPV on a periodic
basis
4) Periodic profit + 1) Physical asset
incentive fee contribution

Musyarakah

3) Periodic profit
Investors
2b) issue proceeds

2a) sukuk proceeds

SPV

5) Issues sukuk Musharakah
+ periodic profit

3.1.3) Structure of Sukuk
Musyarakah - 2

Investor Investor Investor

2) The Musyarakah
1) Musyarakah venture venture shall be carried
between the investors out through the issuer in
its capacity as an agent

Issuer
3) Issuer shall issue the
sukuk Musyarakah to the
Musyarakah martner
Trustee
Construction of 4) Trustee shall declare a
project / trust over the trust asset
and all rights under the
undertaking the Musyarakah venture
Musyarakah
venture

3.1.4) Exchangable Sukuk Structure

Investors

sukuk Sukuk proceeds

Cash settlement
purchase right deed
Obligor
Issuer ( X Y Z) (company A )
Purchase undertaking
deed

Sale price
Sale of equity
(nominal)

Sale price (nominal)

SPV ( A B C) Company A
Sale of equity pool

3.1.5) Exchangable Sukuk
Structure- Exchangable Mechanism

Investors
Issuer ( XYZ Ltd)
(sukuk holders)

Equities/cash

Offer to purchase
Exchange exchange property Obigor
Agent Company A
Pay cash is (order is
accepted)

3.1.6) Sukuk using al- Istisna’
Structure

Sukuk Holders

5) SPV pays coupon
1) Sukuk proceed
to investor

4a) transfer title to
2) Sell asset
asset

Contractor SPV End Buyer
4b) pay monthly
3) Payments made installment

3.2 Shariah Compliant Securities
Shariah compliant securities are securities of a Bursa Malaysia-listed
company which as Shariah have been classified as Shariah permissible
for investment, based on the company’s compliance with Shariah
principle in terms of its primary business and investment activities.

In the process of determining the Shariah Status of listed securities, the
SAC developed several basic Shariah criteria as guidance where the
criteria based on the Quran and Sunnah.

The SAC gave further consideration to companies that were involved in
both Shariah-compliant and non-compliant activities by applying the
concept of maslahah (public interest) and umum balwa (common
plight).

For this purpose, specific benchmarks and additional criteria were
formulated to enable the SAC to determine the Shariah status of such
companies.

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3.3 Shariah-based Unit Trust

1) Structure of the Shariah-based unit trust fund
consists of:
• A manager- handles the investment and operations of
the fund.
• A trustee- protects the rights and interests of the unit
holders.
• Unit holders- investors who are entitled to a
proportionated interest of the assets of the fund. The
obligations of these three parties are spelt out in the
deed of the fund.

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Continue….

The types of the fund are as follows:
TYPES OBJECTIVES SUITABLE FOR

1) Income Invest in Islamic fixed income Investors with low-
funds securities and huge dividend- risk appetite,
yielding Shariah-compliant shares, seeking income with
with a view to pay out most of the some level of
return. growth
2) Capital Invest in Shariah-compliant shares, Investors with high-
growth fund with a view to maximize capital risk appetite and
growth over the long term. are keen on capital
accumulation.

3) Aggressive Similar to capital growth funds but Investors with high-
growth funds with investment in aggressive, fast risk appetite.
track Shariah-compliant shares that
promise high returns, but with
higher risk
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Continue….

TYPES OBJECTIVES SUITABLE FOR

4) Balance Three main objectives: income, Well-diversified and
funds moderate capital appreciations and investors that seeking
capital preservation. reasonably safe
- invest across a broad range of investments where
assets categories including Shariah- the risks are lower
compliant shares, Islamic fixed income and which produce
securities and cash. average return.
5) Index Invest in the basket of Shariah- Investors seeking
fund compliant shares to track the medium to long-term
performance of a selected stock capital appreciation
market index.

6) Bond Invests in Islamic fixed income Investors seeking
funds securities such as Islamic bonds and greater security in the
short-term money-market instruments form of capital
preservation and
income with minimal
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3.4 Islamic Real Estate Investment Trust (i-REITs)

The issuance of the real estate investment trusts (REITs)
guideline by the SAC has helped kick-start the REITs industry
in Malaysia. Subsequently, the SC released the Guidelines for
Islamic Real Estate Investment Trusts (I-REITs Guidelines) to
facilitate the introduction of Shariah-compliant REITs.

The I-REITs Guideline was set as the global benchmark for
the development of I-REITs Guideline is to provide clear
guidance on and new investment opportunities in collective
real estate investments through a Shariah-compliant capital
market instrument

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3.5 Islamic Exchange Traded Fund (ETF)

 ETFs are essentially unit trust funds that are listed and traded on a
stock exchange. They are open-ended with a unique in-kind creation
and redemption mechanism supported by a system of participating
dealers and liquidity providers.

 ETFs are listed and therefore their units can be bought and sold
anytime during stock exchange trading hours. Investors buy and sell
ETF units through their stockbroker rather than through unit trust
agents, ETFs are index tracking fund.

 The main difference between a conventional ETF and Islamic ETF is
the benchmark index that the Islamic ETF tracks. An Islamic ETF
only tracks an Islamic benchmark index where the index
constituents comprises of the companies which are Shariah-
compliant

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4.0 Statutes and Guidelines
Governing Islamic Capital Market
4.1 Securities Commission Act 1993

Any person who issues, offer for subscription or purchase, or makes
an invitation to subscribe for or purchase debentures would require
the approval under s32 of the Act.

Sc will act as the sole regulatory authority both in respect of the
issuance of securities as well as in respect of the registration of
prospectuses.

In considering proposals by public companies to undertake an issue
of debt securities whether convertible or not :
company is in need of fund
 For the expansion of the business activities

 For diversification of business to achieve synergy

 To refinance its existing borrowings

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 S32(2),a person who purpose to do any the following
proposal would have to submit to SC for approval as
provided in s32(3) and (4):

make available, offer for subscription or purchase, or issue an invitation to
subscribe for or purchase securities in Malaysia

make available,offer for subscription or purchase,or issue an invitation to
subscribe for or purchase, outside Malaysia, securities of public company,
or to list such securities on a securities exchange outside Malaysia.

Make a bonus issue of securities of a public company other than by way
of the capitalization of inappropriate profits

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All proposal submitted to the SC for its consideration,
including the issuance of IPDS, shall confirm the
following :

The applicant must public company

Listed companies which submit a proposal to the SC for its
consideration must do so through a merchant bank.

Unlisted company through merchant bank or an approved firm of
public accountants. Seek a waiver from making a submission
through a merchant bank or an approved firm of public account.

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4.2 Guidelines on the Offering of Private
Debt Securities

Any person who is corporation within the meaning of (1) of s2 of the act is
eligible under this guideline.

Anybody corporate formed or incorporated or existing within Malaysia or
outside Malaysia and includes any foreign company

For any corporation, the necessary approvals from other regulatory bodies
would have to be obtained prior to the submission of any written
declarations and information to the SC.

To consider in undertaking IPDS issue would be rating by a rating agency
approved by SC. However, a rating is not required if the IPDS issued are
non-transferable and non-tradable and whose investors do not require a
rating.
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Item 32 of the Guidelines provides additional requirements
for IPDS. The issuer must appoint either:

i. an independent Shariah adviser (s) who has been
approved by SC who meets the following criteria-
a) is not an undischarged bankrupt,
b)not been convicted for any offence of criminal,
c)good repute
d) possesses the relevant qualifications and expertise,
particularly in Fiqh Muamalah and Islamic
Jurisprudence and has a minimum of 3 years working
experience or exposure in Islamic Finance

ii.Islamic bank or licensed institution approved by BNM
to carry out Islamic Banking (IB) scheme.

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

According to the guidelines, any Shariah principle and concept adopted in order to
structure an IPDS must be based on principles and concepts approved by SC‟s of
SAC

The reason for grouping the products under IPDS is to encourage market participants
to develop products using the Shariah principle approved by SC, even though some
of them not necessarily fall under the category of “debt instruments”.

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4.3 Guidelines on the Offering of Asset
Backed Debt Securities

ABS is a private debt security that is issued according to a
securitization transaction.

The securitization transaction can be understood by involving the
transfer of assets or risks to a 3rd party where such transfer is
funded by the issuance of debt securities to investors.

Assets that want to be securitized must generate cash flow and be
transferred at a fair value.

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Originators must have a valid and enforceable interest towards the asset
and in the cash flow prior to the securitization transaction.

 If the originator is a charge as in the case of an Ijarah, the charge must
have been created for a period of more than 6 months before the transfer.
Assets must not contradict with Shariah principles where Islamic ABS is
involved.

 The originators must be incorporated in Malaysia

The assets that are transferred must be put beyond the reach of the
originator and its creditor even in bankruptcy.
The risk from the transfer of that asset by an originator to an SPV may
be re-characterised as a financing transaction

The SPV itself must be „ bankruptcy remote‟ which mean that, any other
business activity that are not related with the securitization transaction
should not exist.
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 SPV should merely hold assets, issued ABS and ensure appropriate
managerial of the cash flow from the assets.
The originator may only purchase senior notes that junior notes ABS

issued by the SPV up to 10% of the original amount of the senior
notes ABS issued by the SPV at the market value at anytime unless
otherwise permitted by the SC.

Originator as primary subscriber resulting in the originator holding
more than 10% of the ABS , the originator must make best endeavors
to place out such excess ABS within e period of not more than 3
months from date of issuance of such ABS.

The issuance of junior notes for purpose of credit enhancement of
the transaction to obtain a better rating for the ABS notes issued.

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

The credit enhancement are provided by the originator
and also having reserve fund , third party or parental
guarantees and cash collateral account.
The originator also act as services that make sense for

the originator to be the servicer because the source of all
the asset transferred to SPV.

SPV being a special purpose vehicle established may
not have the capability and expertise to administer and
mange the assets.

In service agreement, the service provided on arm's
length basis on market term and conditions.

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Some of the information included :

detailed explanation of the flow of the fund

the disclosure of the risk factor associated with investing
in ABS
detailed description of the structure of the securitization
transaction and significant agreement relevant to the
structure

 It must be submitted to SC. Subject to the non-application of
the SC's Policies and Guidelines on Issue/offer of the
Securities on the securitization transaction, approval within 28
working days from the date of receipt of all declarations,
complete information and documentation under the guideline.
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• Fund raised from any issue, offer or invitation of ABS under the
guideline must not be channeled by the originator and the SPV to
finance such activities as maybe announced by the National Bond
Market Committee from time to time.

• However, SC on behalf of the National Bond Market committee
announced on August,2003 the relaxation of some of the restriction
on the utilization of process from the issuance of the private debt
securities for the construction of the hypermarket.

• The issue could be used to finance the development of hypermarket
subject to certain conditions that the proposal to operate a
hypermarket has to be approved by the Domestic Trade and
Consumer Affairs Ministry

• Prior to this, “construction of hypermarket” fell under the definition
of 'construction of shopping complex'.

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4.4 Guideline on the Minimum Contents of
Requirements for the Trust Deeds
Trust deeds used to be the responsibility of the Register of Companies. The
approvals and registration of trust deeds rest with SC although the filling of trust
deeds has to be done with the Register of Companies, save and except for unit
trust which to be submitted to the SC for registration.

It is governed by the Guidelines on the Minimum Contents Requirements for Trust
Deeds, the fact that effect the new provision under Division 4 of Part IV of the Act.
The Guidelines provide for the positive requirements for a trust deed in both public
offer and private placements.

The guidelines provide substantial coverage of key areas in the trust deed. The
power and duties of the trustees are well defined.

Even in the areas of sinking fund, it provides that the provision must be made for
an Islamic based account for Islamic debentures and to state the holder and
operator of the account. The borrowers’ covenant to pay and comply by the trust
deed and debenture are specified in it.

It also gives a number of guidelines with regards to the events constituting default
and the remedies for such default. There is even the requirement to have the form
and terms and conditions of the certificates representing the debentures.
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4.5 Guidelines on Content of Prospectus
for Debentures
The structure of the prospectus is well provided under the
specific requirement in which it stipulates the necessary
items to be inserted in every part of the structure.
With the coming into force of amendments to the Act, the SC
is now the approving and registering authority for
prospectuses other than for the offer for subscription for
purchase of shares or debentures by an unlisted
recreational club.
In addition, to the requirements which apply to both Islamic
and Conventional debentures, a few pertinent points in
relation to Islamic debenture would have to be noted.

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Continued……

The requirements which apply to both Islamic and
Conventional debentures
Concerning the terms and conditions of the debentures, the
frequency of profit payments and not interest payments.
It provides for the identification of Shariah principle and concept
adopted.
As for all other Islamic capital market products, the type of
underlying asset for the transaction would have to be stipulated.
The industry which the issuer operates and description of the
industry which the issuer is in.
With regard to experts’ statements and reports, excerpts from the
Shariah adviser’s report should be disclosed in the prospectus.
The qualification and experience of the Shariah should be also
disclosed.

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4.6 Controller of Foreign Exchange
The Guidelines on the Offering of PDS provides that funds rose in
Malaysia by any person, including a non-resident and non-resident
controlled company issued by the Controller of Foreign Exchange
from time to time.
Practice Note 1 of the SC provides for the application of the
Guidelines on the offering of PDS to offer, issue or invitation of
foreign currency denominated PDS.
- It seeks to display, vary or clarify the application of the Guidelines on the
offering of PDS of a Malaysian public company made exclusively to persons
outside Malaysia. Under its clarification on the utilization of proceeds
requirements, it provides that for funds raised from issues, offers or
invitations in relation to foreign currency denominated PDS and are intended
to finance activities within Malaysia. Besides, all such funds raised by the
Malaysian public company through such offers, issues or invitations must
comply with any requirements and regulations as may be issued by the
Controller of Foreign Exchange from time to time.

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4.7 Rules on the Scripless Securities under
the Real Time Electronic Transfer of Funds
and Securities (RENTAS) System
• The objective of the system is to provide a uniform set of
rules and procedures to govern the issuance and settlement
of scripless securities under the RENTAS system.
• All securities issued in scripless form through RENTAS
must comply with the terms and conditions as set out in the
Information Memorandum, Depository and Paying Agency
Agreement (DPA), Trust Deed and other relevant
documents binding the issues.
• The agreement must be in accordance with the standard
format, and any amendments to the DPA must be made
with prior approval from BNM
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Continue….
• Each issue shall be represented by a global certificate and
has to be lodged with the Central Depository for safe,
custody.
• Submission of the certificate for safe custody by the LA
must be made at least one business day before the issue
day.
• In terms of allotment procedures, RENTAS shall initiate the
allotment process to the successful principal dealers, who
are licensed Financial Institutions appointed by BNM to
carry on the business of dealing in specified instruments
• The allotment process shall also include bids tendered
through the principal dealers

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Cont…
• After successful crediting and debiting of the principal
dealer’s securities and cash accounts, a completion
advice shall be sent to the principal dealer.
• The principal dealer will construct a re-allotment advice to
the successful subscribers on the allotment date or the
issue date.
• If there are insufficient funds in the dealer’s cash accounts
at the beginning of the issue date, the allotment
transaction shall be queued (priority queue).
• If other than the principal dealer’s network, RENTAS will
transfer the whole stock to the lead arranger’s securities
account.

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Cont…
• The sale/transfer shall be affected through RENTAS,
subject to the availability of sufficient funds in the cash
accounts of the said authorized depository Institution.
• If the issuance is through the principal dealer’s network
and if there are insufficient funds, the transactions shall
be put on normal queue and priority queue for non
RENTAS members as well as RENTAS members
respectively.
• In the event that the subscribers fail to settle the
allotment proceeds on the issue date, the allotment
transaction shall be deemed and compensations are to
be applied accordingly.

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Cont…..
• The pending allotment transaction in the priority queue
shall be cancelled, and for the normal queue, the lead
arranger shall instruct the subscriber to cancel the
allotment transaction in the payment queue from the
subscriber’s front end system.
• The securities shall not be aborted and downsizing is not
allowed on the issue date
• Also applies to unsettled allotted securities which are not
underwritten as well.
• Except for the existing IPDS issues which shall continue
to follow the formula stated in the trust deed, the formula
for scripless IPDS issues shall be guided by these Rules.
The proceeds formula for dividend bearing IPDS are
where the secondary notes are created is as follows :
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Cont…
Proceeds = FV x P/100

FV = Face value or nominal amount of bonds
P = price of bonds per RM100

The proceeds formula for dividend bearing IPDS where
the secondary notes are not created is as follows:

Proceeds = Principal + Accrued dividend
= FV x P + FV (c x t)
100 365

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Cont…
• Where,
• FV=face value or nominal amount of bonds
• P = price of bonds per RM 100
• C = dividend rate per cent per annum (5 decimal places)
t= number of days from the last dividend date to the settlement date

The formula for the calculation of the dividend/accrued
dividend, where the secondary notes are not created,
Dividend = FV ( c x t )
365

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Cont…
• FV= face value or nominal amount of bonds
• c = dividend rate in per cent per annum ( 5
decimal places)
• t =number of days from the last dividend date to
the settlement/next dividend date

*Note: in a leap year, t would still be calculated
from the last coupon/dividend date to the next
coupon/dividend payment date

Page 52

(a) In the event of an expected holiday, the dividend payment
date shall be the next business day, if the latter falls within the
same month. If the next business day falls into the next
month, the dividend payment date shall be the preceding
business day in the current month.
(b)For redemption (including the last dividend date), if it falls on
an expected holiday, the proceeds shall be paid on the
preceding business day.
(c)For an unexpected holiday, the dividend payment date and
redemption date shall be the next business day, irrespective
of whether it falls into the next month or not.
(d) For any adjustment of payment date, the dividend shall be
adjusted accordingly (if applicable)

Page 53

Cont…
• Therefore, for transactions which do not use the delivery
versus payment system the settlement shall be agreed
mutually between the sellers and buyers, and any claims for
non delivery or late delivery will have to be settled by the
parties concerned outside the RENTAS system.

• The delay or failure to settle a securities transaction within
the stipulated cut-off tome may result in a breach of BNM’s
regulatory requirement.

• If the settlement was delayed but completed on the value
date, the formula would be similar if the settlement failed to
settle on the value date, the seller will have to hold the
securities until the settlement is completed
Page 54

Cont…
• The seller should therefore recalculate the proceeds if this was Islamic
securities to reflect the additional holding period. In this case, the
calculation of compensation shall be as follows:

Compensation Claim Amount = Amount x (IRR + R %) x Day
36500

Where,

Amount = the amount due for the settlement of the transaction.
IRR = shall be the Islamic Average Weighted Rate of the industry computed by
BNM for the penalty arising from the cheques clearing differences between
banks participating in the SPICK.
Day = this delay will be deemed as 1 day for interest calculation.
R = reserve cost (where applicable) R is currently fixed at 1% and is subjected to
review

Page 55

4.8 Fully Automated System For Issuing/
Tendering (FAST)
• Paragraph 23 of the Guidelines provides that unless a listing
is sought on any Malaysian stock exchange, all issues of PDS
are to be reported or tendered on the Fully Automated System
for Issuing/Tendering (FAST) (see “Rules on Fully Automated
system for Issuing/Tendering (FAST)).

• It provides a uniform set of procedures and practices to
govern the primary issuance/tendering of all instruments
captured under FAST.

• FAST will be only entering point for creation of instruments
approved or specified by BNM. Securities approved by BNM
and captured under FAST include PDS and IPDS.

Page 56

Cont…
• Membership is open to all eligible investors as approved
by BNM and any approved authorities

• An organization is deemed to be a member if it has
purchased FAST workstations. Organisations intending to
subscribe FAST workstation must obtain the prior
approval of BNM by submitting a written application to
Pengarah, Jabatan Pengawalan Bank, BNM.

• It is the responsibility of FAST members to ensure that
their workstations are protected from unauthorized use,
fraud limited access given and any loss incurred. They are
not even allowed to make any modifications, alterations or
additions to the hardware and software without the prior
approval of BNM
Page 57

According to Article 4.1 of the FAST rules,the
benefits of FAST are as follows
(a) An online system without any downloading
procedure.
(b) One system to capture all issuance of instruments
regardless of the mode of issue.
(c)For tendered instruments, FAST provides
standardization in tendering procedures in terms of bid
submission tender processing and announcement of
results.
(d) For non-tendered instruments. FAST enables the
creation of facility and stock to be uniquely identified
by certain codes of reference.
(e)Provides certain interface functions to Bond
Information and Dissemination System and RENTAS

Page 58

Cont..
• Here are examples of IPDS securities which are
captured under FAST are Khazanah bonds issued under
the principle of Mudharabah, Islamic Notes Mudharabah,
Sanadat Mudharabah Cagamas and Islamic Commercial
papers.
• If one needs to issue Islamic Commercial papers, it
would be tendered on the exact purchase price basis
expressed to the nearest sen and the price per/100 will
be calculated.

Purchase Price = SP ( 1- ( r x t)
36500

Page 59

Cont..
• Where,
• SP = selling price being the face value/nominal
value
• r = the applicable yield/rate expected (in percent per
annum)
• t= the number of days in the tenor of the papers
9which shall include the issue date but shall exclude
the maturity date)

Hence, bidders may use this formula for computation of
exact purchase price. Purchase price must be rounded
to the nearest two decimal places when submitting the
tender

Page 60

Cont…
• Under the issuance of IPDS, only licensed merchant
banks, commercial banks and discount houses who are
FAST members and RENTAS members are allowed to
lead manage and facilitate facilities under IPDS.

• In the event that the issues are under subscribed, i.e
when the total tender amount submitted by bidders is
less than the issue amount or when the tender panel
members bid higher/lower than the underwritten price
respectively, the underwriters are obligated to take up
the unsubscribed amount or the amount of the bids by
the tender panel member which rate is higher than the
underwritten yield or price which was lower than the
underwritten price.

Page 61

4.9 Rules on Bond Information and
Dissemination System (BIDS)

• The BIDS Rules shall be effective from October 1, 2001.
These Rules are applicable to all members for all
dealings in instruments and any other obligations with
respect to BIDS.
• Of the instruments which are covered by BIDS would be
IPDS as well.
• Membership is open to financial institutions licensed
under the BAFIA and any other persons approved by
BNM

Page 62

5.0 Conclusion
• The principle goal of establishing Islamic capital market
is to channel savings into long-term productive
investments.

• Banks with strong capital could mitigate the possibility of
bank failure when they are required to perform
provisioning exercise.

• In Malaysia, the Securities Commission (SC) assumes a
vital and leading role for formulating screening guidelines
which are applied to all listed companies to determine
their halal status.
Page 63

6.0 Reference

Associate Professor Dr. Che
Zuina Binti Ismail, (2012),
Islamic Legal Framework,
MARA University of
Technology: Centre For
Islamic Thought and
Understanding.

Page 64

Thank you…^_^

Page 65

Legal framework of islamic capital market

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