The Securities and Exchange Commission of Thailand (SEC) is currently in the process of issuing a new regulation to permit both domestic and international issuances of Sukuk certificates in accordance with Islamic financing principles (the Sukuk Regulation). We have been informed that the new regulation is likely to be issued in around July this year. In addition, to facilitate Sukuk issuance, the Thai Ministry of Finance (MOF) has prepared a draft regulation to exempt the originator from land transfer taxes and registration fees which is due to be submitted for cabinet approval shortly.
Previously there had been no laws in place to accommodate Sukuk issuance in Thailand and no deals had taken place. However, according to press reports, the Islamic Bank of Thailand plans to issue Thailand’s first Sukuk certificates this year once the new regulations are issued. With a Muslim population of approximately nine million, market sentiment permitting, there are hopes that the new regulations will enable Thailand to take the first steps towards developing into an Islamic finance hub, enabling it to draw capital from the Middle East and elsewhere.
Based on a draft summary of the Sukuk Regulation previously circulated by the SEC in late 2009 and other publicly available information, this article seeks to assess the general legal framework for Sukuk issuance in Thailand by analyzing the likely key provisions of the Sukuk Regulation and related laws. Please note however that the final version of the Sukuk Regulation may well feature certain amendments to the previously circulated draft summary. It is possible that the details summarized below may be subject to change as may the timing of issue of the finalized regulation.
Sukuk Regulation
The Sukuk Regulation will essentially seek to set out what Sukuk structures are permitted, together with the applicable SEC approval and filing requirements. The latter will essentially dictate which entities can issue Sukuk certificates and in what circumstances.
Permissible Sukuk structures
Initially, the SEC will permit the issuance of Sukuk certificates under five popular types of structure, namely: Ijarah (leasing), Istisna (custom manufacturing), Mudarabah (cost-plus financing), Musharakah (partnership) and Wakalah (agency). The Sukuk certificates must be unsecured, unsubordinated, with a definite term such as not perpetual certificates and must not be convertible. To ensure that Sukuk certificates are issued in accordance with Shariah principles, the SEC requires the structure to be reviewed by a Shariah advisor.
Approval and filing requirements
It is anticipated that the Sukuk Regulation will permit both public offerings and private placements of Sukuk certificates. Generally, the applicable approval and filing requirements are likely to be similar to those of the SEC for conventional bonds with the key requirements for domestic offerings being as follows:
(a) Public offerings
Approval requirement: To be able to go ahead with an issuance, the issuer and, if they are not the same entity, the originator must jointly apply for SEC approval by submitting to the SEC an application form, together with the required corporate documents. The SEC will inform the applicant of the result within seven business days of receiving the complete and accurate application form and supporting documents.
This is effectively an application for the approval of the issuer and, once the SEC grants its approval, the issuer will be considered to have been “shelved” as an issuer with the SEC. As a shelved issuer it may issue as many series of Sukuk certificates of unlimited value within two years from the date of the SEC approval. However, prior to each issuance, the approved issuer must disclose features of the Sukuk certificates and submit certain documentation to the SEC (including transactional documentation and board of directors’ or shareholders’ approval).
Filing requirement: In addition the issuer must file a registration statement and draft prospectus with the SEC prior to each issuance. The Issuer and a financial advisor must jointly prepare and certify the accuracy of information in the registration statement and draft prospectus, except where (i) the issuer is a listed company or a legal entity established by special legislation, or (ii) the Sukuk certificates are short-term certificates. An offer can only be made after the filing becomes effective, which is 14 days after the date the SEC receives the complete registration statement and draft prospectus. Except where (i) the issuer is a listed company or a legal entity established by special legislation, or (ii) the Sukuk certificates are short-term certificates.
Rating requirement: The Sukuk certificates must be rated. If the certificates are short-term with a maturity period of 270 days or less, the SEC may permit the issuer to use an additional issuer rating.
Trustees: For each issuance of Sukuk certificates, the SEC requires the appointment of: (i) an asset trustee, which will hold the underlying assets and issue the Sukuk certificates; and (ii) a Sukuk trustee, which will be appointed to represent the investors. The trustees must be separate entities to ensure that there are no conflicts of interest.
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Asset Trustee: The asset trustee may be the originator or a subsidiary of the originator. The asset trustee will be responsible for issuing Sukuk certificates, buying, holding and selling the underlying assets. The asset trustee must receive permission from the SEC to act as an asset trustee. The asset trustee may only look after assets relating to the Sukuk certificates which it issues.
Underwriter: Subject to certain exceptions, the issuer must appoint an underwriter.
Listing requirement: The issuer must list the Sukuk certificates with the Thai Bond Market Association.
Eligible applicants: Importantly, the issuer and originator must be either a company incorporated in Thailand (which would include a special purpose vehicle (SPV)), a foreign bank with a full branch in Thailand or a legal entity established in Thailand by special legislation. The SEC’s requirement that any SPV issuer be incorporated in Thailand means that foreign investors will be unable to seek to reduce their country exposure through the use of an offshore SPV issuer. Though typically one may expect the issuer to be an SPV, the Sukuk Regulation also contemplates that the issuer may be either the originator or an SPV.
(b) Private Placements
Under the Sukuk Regulation it is anticipated that a private placement will be defined as:
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an offer to institutional investors or high net worth investors of unlimited value,
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an offer to not more than 10 specific investors during any four-month period, or
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an offer for which special waiver is granted by the SEC.
Institutional investors are usually defined by the SEC as commercial banks, finance companies, securities companies, credit foncier companies, insurance companies, state enterprises, governmental agencies, legal entities incorporated by specific legislation, the Bank of Thailand, international financial institutions, the Financial Institution Development Fund, the Government Pension Fund, the Provident Fund, mutual funds and similar types of foreign investors. A high net worth investor is likely to be defined as an individual having assets worth THB40 million (US$1.22 million) or more (excluding debts) or a legal entity having assets worth THB200 million (US$6.12 million) or more according to its most recent audited financial statements.
Approval requirement: The issuer and the originator will not be required to submit an application for approval but will instead likely be deemed to have received SEC approval once the issuer: (i) registers the transfer restriction applicable to an issuance with the SEC; and (ii) submits to the SEC the draft terms and conditions and trustee agreement. Note that prior to each issuance, the approved issuer must disclose features of the Sukuk certificates and submit certain documents to the SEC.
Filing requirement: There is no filing requirement for private placements other than for offerings to institutional investors or high net worth investors, in which case the issuer must file with the SEC a certified registration statement and draft prospectus. The filing effective date is five business days after the date the SEC receives the complete registration statement and draft prospectus.
Rating requirement: There is no rating requirement for private placements except for offers to institutional investors or high net worth investors, in which case, either the Sukuk certificates or the issuer must be rated.
Trustees: The same principles apply in respect of trustees as for public offerings.
Underwriter: An underwriter is not required to be appointed for private placements.
Listing requirement: No listing requirements exist for private placements except for Sukuk certificates offered to institutional investors or high net worth investors which must be listed with the Thai Bond Market Association.
Eligible applicants: Eligible applicants for private placements are the same as for public offerings.
International versus Domestic Issuances
The above summary is drafted from the perspective of domestic issuances. The main difference for an issue to offshore investors is likely to be that there will be no filing requirement (the issuer would merely have to apply for SEC approval and the criteria for approval are likely to be less stringent than for domestic issuances). In addition the general approach is likely to be that domestic deals would need to be denominated in Thai Baht, whereas foreign deals would need to be denominated in a foreign currency.
Other Key Thai Laws
Proposed tax and registration fee exemptions
Potential market participants have previously commented that the Thai tax code has hindered the development of Islamic finance in Thailand, pointing out that: (i) returns from Sukuk investments are classified as rental revenues subject to a property tax; and (ii) transfers of land or property assets to a SPV are taxed as a land transaction. In this regard the exemption from land transfer taxes and registration fees proposed by the MOF may further facilitate transactions.
The Trust Act
The other key Thai law that will combine with the Sukuk Regulation to facilitate Sukuk issuance in Thailand is the Act on Trusts for Capital Market Transactions (the Trust Act). This was enacted in 2007 and crucially allows for the concept of an asset trustee and a Sukuk trustee in a civil law system which previously had no ‘trust’ concept.
Conclusions
The anticipated SEC permission to issue Sukuk certificates, together with the MOF’s proposed exemptions from land transfer taxes and registration fees, are likely to be very encouraging. By removing key impediments, they may well enable Thailand to take its first steps into the vast Islamic finance market. Indeed press reports suggest that in the coming months the Islamic Bank of Thailand plans to issue a Baht denominated Sukuk adopting a Wakalah structure with an issue size in the region of THB5 billion (US$153 million).
Stephen Jaggs
Partner
Allen & Overy (Thailand)
Email:
[email protected]
Siripen Kaodara
Senior associate
Allen & Overy (Thailand)
Email:
[email protected]
Matthew Waudby
Senior associate
Allen & Overy (Thailand)
Email:
[email protected]