What are the conditions for issuing sukuk?

Sukuk is a modern concept of Securities that are freely traded among banks, companies, and individuals alike, also It widely spreads in recent times due to the need for modern instruments to finance projects, especially government projects.

As it provides an alternative tool to traditional loans forms, the types of Sukuk vary according to the terms and conditions of issuance. We will continue discussing the basic principles of Sukuk as follows:

The conditions of the project or activity to be financed through Sukuk Issuance

Egyptian law stipulates several conditions for the project or activity to be funded through Sukuk Issuance as follows:

• It shall generate an income according to a study prepared for this purpose.
• It shall be managed by a specialized management team with high experience in the type of activity.
• Only Egyptian companies may issue Sukuk to fund a specific activity or project.
• It shall have independent financial accounts than the other activities or projects of the issuer and the beneficiary.
• The project’s accounts shall be monitored by one or more auditors appointed by the issuer from among those registered with the Financial Regulatory Authority (FRA).

Entities that may benefit from financing by issuing Sukuk

The following entities may, after FRA approval, benefit from financing through a Sukuk issuing as follows:

• Joint stock companies according to the provision of Capital Market law no. 95 of 1992 or Joint Stock companies’ law, Limited Partnership by Shares Companies, and Limited Liability Companies whose articles of association allows it.
• Banks whose articles of association allows it and after obtaining the approval of the Central Bank of Egypt.
• Public entities and other legal persons after obtaining the Cabinet of Ministers’ approval based on the proposal from the Minister of Finance.
• International or Regional Financial Institutions after obtaining approval from the board of directors of the central bank of Egypt.

Conditions for issuing Sukuk by Sukuk Company

1- Special conditions issuance for Sukuk Company

• Sukuk Company shall be independent of the beneficiary or any of its related parties in a manner that avoids any conflict of interest.
• The approval of the company’s Extraordinary General Assembly for issuing Sukuk.
• In case of issuing Sukuk that complies with the provisions of ISLAMIC SHARIA, it shall obtain the approval of the SHARIA Supervisory Sub-Committee for the Issuance.
• Obtaining a certificate of credit rating for issuing Sukuk, the credit rating for issuing Sukuk shall not be less than the level which indicates the ability to fulfill the obligations arising from issuance Sukuk.
• Submitting a study for the financed project with the subscription proceeds and the fair value of Sukuk assets. Such study shall be approved by an independent Financial Advisor registered by FRA.
• Appointing a Paying Agent.
• Prepare an approved prospectus by the Chairman and Managing Director of the company, accompanied by the report of the company’s auditors and legal advisor.
• Submit to FRA a file that includes the approved prospectus, forms, and commitments for issuing and offering Sukuk

2- Special conditions issuance for Beneficiaries

• If the beneficiary is a company or a bank

1. Contract with an Issuance Arranger who supervises the preparation of all documents, procedures, contracts, and deals with FRA in this regard.
2. The net equity shall not be less than Fifty million EGP from the latest certified financial statements.
3. Obtain the approval of the Extraordinary General Assembly for the issuing Sukuk, commitments and obligations arising therefrom.
4. Prepare the prospectus or information memorandum, as the case may be, in accordance with the provisions of Article 14 of the Capital Market Law.
5. Obtain the approval of the Board of Directors of the Central Bank (if the beneficiary is a bank).
6. Consider the minimum and maximum rate of issuing Sukuk in accordance with the FRA’S Board of Directors decision No. 50 of 2019.

For joint-stock companies whose articles of association allow this, it shall comply with the following:

The total value of Sukuk to be registered and issued by such companies shall not be less than 50 million Egyptian pounds or its equivalent.

The maximum limit for each Sukuk Issuance shall not exceed the required limit to finance the project or activity, taking into consideration the nature of the project, according to a study included in the prospectus and in accordance with the credit rating, which shall not less than the decided level by the Board of Directors of the FRA.

For banks whose articles of association allow this:

If the beneficiary is a bank operating in Egypt subject to the supervision of the Central Bank, the total value of Sukuk to be issued shall not be less than 50 million EGP or its equivalent, provided that the maximum amount for any Issuance shall be approved by Central Bank of Egypt.

And shall not exceed the required finance for the project or activity, taking into consideration the nature of the project, according to a study included in the prospectus and in accordance with the credit rating, not less than the level decided by the Board of Directors of the FRA

• If the beneficiary is public legal personalities or public authorities

Public legal personalities and authorities may benefit from Sukuk Issuance by comply with the following:

1. Obtain the approval from the Ministry of Finance for a prospectus or information memorandum for the issuance of sukuk and other documents, data, and declarations related to the issuance to be submitted to the FRA.
2. The project’s accounts shall be monitored by the Central Auditing Organization, in addition to an auditor from among those registered with the FRA, to be selected by the Ministry of Finance.
3. The capital of Sukuk Company shall be totally owned by public sector banks, public sector companies, public business sector, or other public legal personalities.
4. The company shall have two Auditors, one of whom shall be from the Central Auditing Organization.
5. Consider the minimum and maximum value of sukuk.

• If the beneficiary is one of the international or regional financing institutions

1. Obtain approval of the Board of Directors of the Central Bank of Egypt, accompanied by the approval of the competent authority of the international or regional institution.
2. Such International or regional financial institutions shall previously issue Sukuk or other debt instruments.
3. The project is likely to generate revenue, according to a study prepared in this regard, including a sufficient description of the project, specifying the costs of its establishment, development, management, components, and stages of implementation according to what is being subscribed for, and its potential risks, methods of avoiding such risks and guarantees in accordance with approved Sharia controls From the Central Sharia Supervisory Committee.
4. the project shall be independent of other projects of the issuing authority.
5. The project shall maintain independent accounts and financial statements.
6. The institution shall provide evidence of the good performance of previous Sukuk Issuances, provided that it presents, in particular, evidence that there is no breach in the fulfillment of the value of those Sukuk.
7. The institution shall obtain a credit rating for such Sukuk from a certified credit rating agency that the FRA relies on, provided that the rating is not less than the level decided by the FRA’s Board of Directors in this regard.
8. The prospectus shall be accompanied by a report from an auditor from among those registered in the FRA’s register.