1.

0 INTRODUCTION

The ICM is a component of the overall capital market in Malaysia. IT functions as a

parallel market to the conventional capital market, and plays a complementary role to the
Islamic Banking system in broadening and deepening the Islamic financial markets in
Malaysia.
These includes Shariah-compliant stocks, Islamic bonds, Islamic funds and Islamic risk
management products.
The ICM has grown in sophistication and Islamic forms of product structuring, project
financing, stockbroking, asset management and venture capital services are becoming
increasingly widely available.

1
2.0 LITERATURE REVIEW

1. ISLAMIC FINANCIAL SYSTEM: THE MALAYSIAN EXPERIENCE AND THE

WAY FORWARD by MOHAMAD AKRAM LALDIN

Introduction

Malaysia has a very encouraging history of Islamic banking and has big potential to
succeed in this area. However, some areas need to be improved, as suggested in the paper. It
also found that the Malaysian model in developing Islamic financial industry can be taken as a
benchmark in the development of such industry in other countries. One of the important
aspects in human life is the need for a comprehensive system in order to govern their life and
to ensure all the needs are catered adequately including the material needs such as the
financial management. This aspect of life is closely related to the fast-growing industry in the
world nowadays, which is the Islamic financial services industry.

Main Body

The early effort in developing the Islamic financial sector services in Malaysia begins
with the birth of the Pilgrims Fund Corporation or better known as “Tabung Haji” which was
established in November 1962 and commenced operation on 30 September 1963. Its existence
was also strongly attributed to a working paper presented by the Royal Professor Ungku Aziz
titled, “Plan to improve the economy prospective pilgrims” in 1959. The idea was mooted out
of the necessity to develop a mechanism to encourage the Muslims to save for their
pilgrimage as the Malaysian Muslims in the past had resorted to various traditional means of
saving and keeping their money for the sacred journey. Apart from the above reason, there
was also need for an institution which can guarantee the savings of Muslims are free from
elements of usury and its activities are done according to Shariah requirement.

Conclusion

It has to be noted that the rapid progress of Islamic banking over the last two decades
would not have been possible without the pioneering efforts of the Islamic financial
institutions and all those who have put tremendous effort in building up a successful and
vibrant industry. Despite that, the opportunity and prospect for a greater future success lies in
the hand of all

2
 2. PRINCIPLE OF ISLAMIC CAPITAL MARKET by AHMAD AUDU MAIYAKI

Introduction

In the fulfilment of its intermediation role of transferring funds from surplus to

deficit unit of the economy, Islamic Capital Market (ICM) play a critical role in that
regard (Ahmad, Maiyaki, & Yusoff, 2012). The continuous growth of ICM is as a
result of its ability to support the global financial system more especially after the
recent failure of the conventional financial system which led to a general crisis.

Main Body

Similar to the conventional equity is the Islamic equity which constitutes

partnership by sharing both loss and return. Thus, the holder of the equity can enjoy
dividends if profits are made and the issuing organization decides to disburse part of it
(ISRA, 2011). Furthermore, capital gain could be realized when the shares are sold at a
premium price. It should be noted here that the securities of a company can only be
negotiated if some of its assets are in the form of illiquid.

Part of the ethics relevant here is that the business must be a permissible one
or halal (Wilson, 1997). Companies that have mixed income from both Shariah compliant
and non-Shariah compliant operations should be subjected to a screening process. It has been
argued that operating a corporation totally in line with Shariah requirements might not be
feasible. To this end therefore, a Shariah stock selection criteria have been established to
determine the benchmark of the non-compliant element

Conclusion

At present, Malaysia faraway exceed other Muslim countries in term of capital market
infrastructure with persistent support by the government providing impulsion for the growth
of Malaysian Islamic Capital Market. Every perspective, such as product innovation,
infrastructure facilities, policy incentives, human capital development, liberalisation and
regulatory framework are being well focused. In addition, it is a continuous effort whereby all
aspect is being reviewed by the respective bodies.

3
3. REGULATORY CHALLENGES POSED BY ISLAMIC CAPITAL MARKET
PRODUCTS AND SERVICES by PROFESSOR RODNEY WILSON

Introduction

As many of the products are distributed to retail clients by Islamic banks and through
the Islamic windows of conventional banks, it is also pertinent to deal with the regulations
of these institutions, not least because of the distinctive liability and asset structures of
Islamic banks.

Main Body

Financial services regulators and central banks cannot take on the responsibilities for
shariah compliance, but they should ensure proper procedures for ensuring compliance are
in place.

Conclusion

The following decisions, on the 18th December 1993 guidelines were therefore issued on
how a new Islamic inter-bank money market in Malaysia by BNM.

4
3.0 OBJECTIVES

i. Contributes economic growth

ii. Plays a complementary role to the Islamic banking and takaful sector
iii. To know the regulation of regulatory bodies of Islamic Capital Market products
and services

5
4.0 FINDINGS

i. Various institutions of the Islamic Capital Market give quantitative and qualitative
direction to the flow of funds that cause economic growth. There are a lot of ways
you can look at Islamic Capital Market that has contributed directly to economic
growth, the first one is it increases the proportion of long-term savings that is
channeled to long-term savings for instance pension and insurance fund. It enables
Employee Pension Fund to invest money in the capital market that has been
deposited by employee and employer, this curb the problem of having deficit
capital to invest. Besides that, both parties will benefit from this.
Moreover, other way Islamic Capital Market has contributed to the economic
growth is by giving a platform for Muslims to invest in the Capital Market. The
capital market has been only active in Malaysia in the 2000s and with that the
Capital and Service Act 2007 has been made and with the help of Shariah
Advisory Council. Muslims are more convinced and that has expended the market.
There are many ways Muslims can participate in Capital Market, for example they
can invest in Sukuk where Bai Dayn is practices. Other Islamic market product is
Shariah compliant securities, Islamic unit trusts, Shariah Indices, Warrants and
others. It is evident that this has grown along with Malaysia’s economy by
reflecting he rising income and saving.

ii. From the outset, the Islamic capital market (ICM) in Malaysia has been an
essential element of the capital market. Within the broader market, the ICM has
effectively functioned as an alternative market for capital seekers and providers
while playing an important complementary role to the Islamic banking and takaful
industry. In short, the broadening and deepening of the Islamic financial market in
this country has all the three strategic pillars: banking, takaful and, more
distinctively, the capital market.
ICM complements the conventional market by providing value-added services
that meet the needs of the market for a broad range of instruments, and have
effectively mobilised and channelled funds to fuel economic growth. It aims to
create an efficient, progressive and comprehensive Islamic financial system that
contributes significantly to the effectiveness and efficiency of the Malaysian
financial sector while meeting the economic needs of the nation. The large

6
 untapped demand for Islamic financial product both locally and internationally,
presents opportunities for Malaysia to establish itself as an ICM center.

iii. Prerequisites for the regulation of Islamic financial institutions

The regulation of Islamic financial institutions is most effective where there is
already a sound regulatory framework in place that provides for adequate reporting,
monitoring of capital adequacy, risk management controls and customer disclosure.
The latter refers to procedures to ensure that institutions know their customers to
prevent money laundering.

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5.0 REGULATORY BODIES

Generally, the main regulatory bodies that govern the Malaysian capital market are:

a. Bursa Malaysia Berhad is he first formal organization for the public trading of
securities only commenced when the Malayan Stock Exchange was established in
1960 (Bursa Malaysia, 2009). On April 14, 2004, the name of Kuala Lumpur Stock
Exchange has been changed to Bursa Malaysia Berhad. It operates a fully-integrated
exchange, offering the complete range of exchange-related services including trading,
clearing, settlement and depository services (Bursa Malaysia, 2009). All listed
companies are either on the Main Market or the ACE Market. The main differences
between the requirements in order to be listed on Main Market and ACE Market are in
term of minimum paid up capital and profit tract record.
b. Securities Commission as the sole authority for the regulating and development of the
capital market in Malaysia was set up under the Securities Commission Act 1993
(SCA). It is reporting directly to the Minister of Finance and responsible for the
regulation and supervision of the activities of the market institutions (Securities
Commission, 2009a). Apart from this role, the SC is also obliged by statute to
encourage and promote the development of the securities and futures markets in
Malaysia (Securities Commission, 2009a
c. Labuan Offshore Financial Services Authority (LOFSA) is the authority to regulate
offshore this capital market. The LOFSA is assisted by the Labuan International
Financial Exchange Inc (LFX)4, which is a wholly owned subsidiary of Bursa
Malaysia Berhad. The LFX is a web based financial exchange that provides listing and
trading facilities for a wide range of financial and non-financial as well as Islamic
financial products.

The scope of jurisdiction for these regulating bodies encompasses both Islamic and
conventional finance matters. Malaysia’s banking and insurance sectors come under the
jurisdiction of Central Bank or also known as Bank Negara Malaysia (BNM) while the
capital market is regulated by Securities Commission Malaysia (SC). Matters related to
offshore finance industry are regulated by Labuan Offshore Finance Industry Services
Authority (LOFSA)

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6.0 REGULATORY FRAMEWORK

i. Securities Commission Act 1993

The date of its royal assent is on 22nd January 1993 and the date of the operation is on
1st March 1993. Securities Commission Act is operated by the Securities Commission
Malaysia or known as SC, it is a statutory body entrusted with the responsibility of
regulating and systematically developing the Malaysia’s capital markets. It has direct
responsibility in supervising and monitoring the activities of market institutions and
regulating all persons licensed under the Capital Markets and Services Act 2007.
Thus, matters regarding capital market for instance determining of whether a company
is shariah compliance will be made according to the guideline given by the SC

ii. Capital Markets and Services Act 2007

Capital Markets and Services Act 2007 received its royal assent on 27 July 2007 and
the latest amendment was made on 28 December 2012. The Securities Commission of
Malaysia indicated that the main policy thrusts of the CMSA are as follows; the first
one is to introduce a single licensing regime for securities and futures intermediaries,
second is to increase efficiency of fund raising process, third is to enhance investor
protection in the primary and secondary market, forth is to promote Malaysia as a
competitive global Islamic financial hub, fifth is to encourage the use of technology in
the capital market and last is to promote self-regulation.

iii. Securities Industries (Central Depositaries Act 1991)

This Act got its royal assent on the 28th of March 1991, and put into operation on the
15th June 1992. It consists of 7 part which the first part talks about the preliminary of
the act. Following that, the second part is about central depository where it concerns
are on restriction, application, effect of withdrawals, approval by central depository
and many more. The third part is provisions relating to deposited securities which
consist of deposit of securities, withdrawal of securities accounts and records and the
last one securities transactions, entries and miscellaneous. The forth part talks about
secrecy provision. The fifth part is regarding offences made in documentations,
enforcement is the sixth and the last one is the general rules.

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7.0 GUIDELINES ON EQUITY

7.1 ISLAMIC FUND MANAGEMENT

INTRODUCTION

In order for investors to invest in Islamic fund, the investment itself must comply with
Shariah principles. It is because Islamic fund can only make investments which are Shariah
compliant. The Shariah principles prohibit Islamic funds from investments in conventional
financial services which banking and insurance or debt instruments which make the returns
earning from interests or excess. Fund’s compliance with Shariah principles is usually be
monitored by Shariah Adviser which appointed by the fund manager.

Any investors, whether they are Muslims or non-Muslims, can invest in Islamic funds.
Some investors may invest in Islamic funds for religious reasons and some may regard them
as socially responsible products. Other investors may invest in Islamic funds in order to seek
diversification in their portfolios.

Guidelines on Islamic Fund Management are issued by Securities Commission (SC) under
section 377 of the Capital Markets and Services Act 2007 (CMSA). These guidelines set out
the requirements that must be followed by an Islamic fund manager that carries on Islamic
fund management. These guidelines also set out the requirements for carrying on an Islamic
fund management business under an Islamic ‘window’.

The following are acceptable Shariah principles and concepts which may be applied in an
Islamic fund management business:

1. Wakalah
A contract which gives the power to a person to act on his behalf, as long as he is alive,
based on agreed terms and conditions.

2. Ujrah
Financial payment for services used. In today’s economy, it can be in the form of
salary, wage, allowance, commission and the like.

3. Mudharabah

10
 A contract made between two parties to finance a business venture. The parties are
rabb al-mal or an investor who solely provides the capital and a mudarib or an
entrepreneur who solely manages the project. If the venture is profitable, the profit
will be distributed based on a pre-agreed ratio. If there is a business loss, it should be
borne solely by the capital provider.

4. Musharakah
A partnership between two parties or more to finance a business venture whereby all
parties contribute capital either in the form of cash or in kind. Any profit derived from
the venture will be distributed based on pre-agreed profit-sharing ratio but a loss will
be shred on the basis of equity participation.
5. Murabahah
A contract which refers to the sale and purchase transaction for the financing of an
asset whereby the cost and profit margin or mark-up are made known and agreed to by
all parties involved. The settlement for the purchase can be settled either on deferred
lump-sum basis or instalment basis, and it is specified in the agreement.

MEMORANDUM AND ARTICLES OF ASSOCIATION

The Memorandum and Articles of Associations of an Islamic fund manager should

state that the Islamic fund management aims to achieve its commercial objectives following
Shariah principles.

APPOINTMENT OF SHARIAH ADVISER

In order for an Appointment of Shariah Adviser, an Islamic fund manager must

appoint either an individual or a corporation as an independent Shariah adviser, approved and
registered by the Securities Commision, and meets few criteria such as the person is not an
undischarged bankrupt, not been convicted for any offence arising from criminal proceeding,
must have good repute and character, and the person who possesses necessary qualifications
and expertise, particularly in fiqh muamalah and Islamic jurisprudence, and has experience
and exposure in Islamic finance.

An Islamic fund manager must notify the SC of any resignation or cessation of

services by Shariah adviser within two weeks of resigning or ceasing of services. A new
Shariah adviser must be appointed within one month from resignation or cessation of services.

11
Where Shariah adviser is subjected to any disqualification or becomes otherwise unfit to
provide his or its services, the Islamic fund manager must ensure that Shariah adviser vacates
the position immediately and must inform the SC of disqualification and vacation of the post.

ROLE OF SHARIAH ADVISER

The roles of Shariah Adviser include to advice on all aspects of Islamic fund
management business in accordance with Shariah principles. Next, to provide Shariah
expertise and guidance on all matters, particularly in documentation, structuring and
investment instruments, and ensure compliance with relevant SC regulations and/or standards,
including resolutions issued by SAC. It also has to review reports of compliance officers of
Islamic fund manager or any investment transaction report to ensure that investment activities
are Shariah compliant and Shariah adviser has to provide written opinion and/or periodic
report to confirm and certify whether Islamic fund management business has been managed
and/or administered in accordance with Shariah principles. In addition, Shariah Adviser need
to provide a written opinion and/or periodic report to confirm and certify whether the Islamic
fund management business has been managed and/or administered in accordance with Shariah
principles.

In carrying out roles of Shariah adviser above, he/she must act with due care, skill and
diligence.

EMPLOYEES COMPETENCY

An Islamic fund manager should at all times, have employees that with necessary
qualification, expertise and also experience for its business so it will help the business to grow.
She/he also must provide sufficient and adequate training, whether interval or otherwise, for
all its employees and licensed representatives so that they acquire necessary knowledge for its
business and have to ensure that its compliance officer is well knowledgeable on Islamic
finance and capital market. The employees should ensure its compliance officer is well
versed on Islamic fund management and have adequate Shariah knowledge on Islamic finance
and capital market.

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PORTFOLIO MANAGEMENT

 Shariah-compliant investment

An Islamic fund manager must ensure that its investment activities are limited in line
Shariah-compliant which for investment in listed securities listed on Bursa Malaysia, an
Islamic fund manager should only invest only in securities listed on the SAC’s list of Shariah-
compliant securities whereas for unlisted securities, an Islamic fund manager is encouraged to
follow SAC’s methodology in determining Shariah status of listed securities. For an
investment in securities which been trade on recognised stock exchange, Islamic fund
manager should only invest in securities endorsed by Shariah adviser of the recognised stock
exchange or by an international Shariah standard setting body.

 Maintenance of accounts

An Islamic fund manager should ensure its clients’ monies and properties are properly
safeguarded under the securities law in accordance to Shariah requirements and its
encouraged to maintain all account with Islamic financial institutions. However, it is
allowed to maintain the accounts in other financial institutions provided which they are
maintained in accordance with Shariah principles.

 Risk Management

In term to managing the risk, an Islamic fund manager is permitted to undertake

appropriate risk management, techniques must be in compliance with Shariah principles and
endorsed by its Shariah adviser.

RESPONSIBILITIES OF THE COMPLIANCE OFFICER

In addition to complying with statutory and general require meets imposed by the
securities law, a compliance officer of an Islamic fund manager must ensure t its business
complies with these guidelines and relevant SC regulators and/or standard, including
resolutions issued by the SAC. The compliance officer must report any Shariah non-
compliance directly to the Shariah adviser, and board of directors of the Islamic fund manager
for consideration and/or immediate remedial action. The compliance officer must also report
the matter to the SC. It is expected that the compliance officer must assist Shariah adviser in
preparing and certifying that the Islamic fund management business is carried out in
accordance to Shariah principles.

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WRITTEN DISCLOSURE AND DECLARATION

An Islamic fund manager is expected to prepare at least, once a year a written

disclosure and declaration to the board of directors of the Islamic fund manager and the SC,
that the Islamic fund management business is carried out in accordance with Shariah
principles. The records must be available for examination upon the SC’s request.

INTERNAL AUDIT

An Islamic fund manager must put in place appropriate systems and mechanisms
within its internal audit requirements to monitor Shariah compliance according to these
guidelines, relevant SC regulations and/or standards, including resolutions issued by the SAC.

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 7.2 UNIT TRUST

CHAPTER 1

INTRODUCTION

The Guidelines on Unit Trust Funds is issued by the SC pursuant to section 377 of the
Capital Markets and Services Act 2007(CMSA). These Guidelines set out the requirements to
be compiled with by any person seeking authorization under the CMSA to make available,
offer for subscription or purchase or issue an invitation to subscribe for or purchase a unit
trust fund.

These Guidelines are aimed at providing a regulatory environment that would protect
the interest of the investing public and facilitate the orderly development of the unit trust
industry in Malaysia. In addition, these Guidelines are also drawn up to govern the operation
of unit trust funds established in Malaysia.

The securities laws and these Guidelines form the regulatory framework for unit trust
funds in Malaysia, and must be read together. All parties to a unit trust fund are expected to
be guided by the letter and spirit of the regulatory requirements.

The SC may, upon application, grant an exemption from or a variation to the

requirements of these Guidelines if the SC is satisfied that such variation is not contrary to the
intended purpose of the relevant requirement in these Guidelines or there are mitigating
factors which justify the said exemption or variation.

In addition to the requirements under these Guidelines, any person intending to offer a unit
trust fund in any jurisdiction of an ACMF Signatory must also observe and ensure compliance
with the Standards of Qualifying CIS

A prospectus for the issuance of, offering for subscription or purchase or invitation to
subscribe for or purchase, any unit in a unit trust fund must be registered by the SC and
comply with the requirements of the CMSA and the Prospectus Guidelines for Collective
Investment Schemes.

CHAPTER 2

In this chapter, the guidelines define all words used in it and it shall have the same
meaning as defined in the CMSA.

15
 Most of these words are already defined in the CMSA thus definition can be referred
in both CMSA and this Guideline. But what differ them is that the words in this Guidelines
are all unit trust related and made it easy to find as they are already narrowed down to a few.
There are some other Acts that this Guidelines refers to, example are Partnership Act 1963,
Companies Act 1965, Islamic Financial Services Act 2013 and Financial Service Act 2013.

CHAPTER 3

Chapter 3 is about the management company. A management company is a company

that establishes a fund, issues, offers for subscription, makes an invitation to subscribe for or
purchase, units of the fund and operates and administers the fund. The requirement is that the
management company must be an entity incorporated in Malaysia and have a minimum
shareholders’ funds of RM 10 million at all times.

The board of director of a management company must comprise at least two

independent members while maintaining a minimum ratio of at least one-third independent
members at all time. The independent directors of a management company must, in addition
to their duties and responsibilities as directors, represent and safeguard the interests of unit
holder.

Other than talking about the management company, it talks about the provision
information, maintenance of a website, holding of units by Management Company.

CHAPTER 4

This chapter is regarding the trustee. It is further divided into the eligibility of the
requirements which a company must be registered under Trust Companies Act 1949 or
incorporated pursuant to the Public Trust Corporation Act 1995 and registered by the SC and
have minimum issued and paid-up capital of not less than RM 500,000. Furthermore, there are
responsibilities that have to be carried by trustee. Then this chapter explains the holding of the
fund’s assets, trustee’s reporting and disclosure obligations, maintenance of records and
holding of units by trustee.

CHAPTER 5

Chapter 5 is about the appointment of third party to undertake functions. The general
knowledge is that a management company or trustee may appoint a third party undertake in
the case of a management company, its fund management function and in the case of a trustee,

16
its custodial function. Other than that, it explains about proper conduct, provision of service
agreement governing the appointment of a fund manager and appointment of a trustee’s
delegate.

CHAPTER 6

Oversight sight agreement falls under this chapter. It consists of explanation of its
investment committee, shariah adviser, panel of advisers. Every each of these individuals will
be further defined its roles and responsibilities and the criteria.

CHAPTER 7

The seventh chapter makes clear about the constitution of the fund. The sub topics
under this is instrument constituting the fund where a management company and trustee are
responsible for maintaining the deed and make necessary amendment to the deed in
accordance with the security laws and guidelines issued by the SC. Second matter is name of
fund, this is to make sure that the name of fund or any class of units of any fund is appropriate
and not misleading. Lastly is, investment objective of the fund must be clear specific and
sufficiently stipulated in the deed.

CHAPTER 8

Investment of the fund talks about the dealings, investment powers, investment in
unlisted securities, in collective investment schemes, warrants, derivatives, structured
products, deposits and securities lending. Funds are prohibited from borrowing other assets
and have investment limits.

CHAPTER 9

This chapter clarifies on the charges, fees and expenses. In matter of charges for
dealing in units, the management company may impose a charge for the sale and/or
repurchase of units. He must not impose a charge unless it is permitted by the deed, express as
a fixed amount or calculated as a percentage of the price of a unit or amount invested and
disclosed in the prospectus. The charges must not exceed the amount or rate stated in the
prospectus in certain condition. Discount and rebates in any form are prohibited. a
management company, its sales agents and distributors must clearly inform investors the
actual rate of charges payable.

17
 Regarding the management fee and trustee fee, a management company and trustee
maybe only are remunerated by way of an annual fee charge to the fund. The fees must not be
higher than that disclosed in the prospectus. The trustee fee must be reasonable and takes into
consideration the roles, duties and responsibilities of the trustee, the interests of unit holders,
the maximum rate stipulated in the deed and the size and the composition of the fund’s assets.
A trustee may be reimbursed by the fund for any expense appropriately incurred in the
performance of its duties and responsibilities as a trustee.

CHAPTER 10

Dealing, valuation and pricing is explained under this chapter. The initial offering
period must not exceed 21 days; however, the initial offer period may be extended up to 45
days for close-ended funds.

In matter of creation and cancellation of units, a management company must instruct

the trustee in writing to create or cancel units of the fund and pay or receive cash to or from
the trustee for the transaction. A management company must pay the trustee the value of units
created within 10 days of giving instructions to the trustee to create units. Any instruction for
the creation or cancellation of units may be modified but only if the trustee agrees and has
taken reasonable care to determine that the modification corrects an error in the instruction
and the error is an isolated one.

Other than that, it talks about dealing in units, close-ended funds, loan financing in the
sale of units, suspension of dealing in units, valuation, price of a unit, incorrect valuation or
pricing and dilution fee or transaction cost

CHAPTER 11

This chapter is about operational matters. The sub topic is matter of size of funds
which it must be expressed in units, a management company must take into account its
resources, expertise, experience and overall capability to carry out its duties in accordance
with the securities law, these Guidelines and the deed. The second one is register of unit
holders, where a management company must take reasonable steps to update the register upon
receiving written notice of a change of name or address of any unit holder to ensure an up-to-
date register of unit holders is maintained.

18
 Cooling-off right must be given to an individual investor who is investing in any unit
trust fund managed by a particular management company for the first time, except for where
such investor is a staff of that management company or a person registered with a body
approved by the SC to deal in unit trusts.

Other than that is about the distribution of income, unit split, conflict of interest or
related-party transactions, use of broker or dealer, rebates and soft commissions, documents
for inspection by unit holders, terminating a fund, accounting and reports during termination,
terminating a class of units, transfer schemes, meeting of unit holders, notice of meetings,
chairman, quorum, resolutions, voting rights, right to demand poll voting, proxies,
adjournment and minutes, training requirements, corporate governance and notification of
changes.

CHAPTER 12

Reporting and auditing talk about the requirement where a management company
must prepare an annual report and an interim report of the fund to provide all necessary
information to enable unit holders to evaluate the performance of the fund. If a management
company intends to change the fund’s annual or interim financial period, the management
company must obtain a written confirmation from the fund’s auditor that the change would
not result in any significant distortion of the financial position of the fund and the SC’s prior
consent before implementing the change.

An annual report of a fund must contain at least the fund information, report on fund
performance, manager’s report, trustee report and shariah adviser’s or panel of advisers’
report, audited financial statements for the financial year and auditor’s report.

CHAPTER 13

The last chapter is about the applications, notifications and reporting to the Securities
Commission Malaysia. The SC provides for two authorization processes for the establishment
of a unit trust fund which is standard authorization process for complex funds and expedited
authorization process for non-complex funds. These two proposal is required to be submitted
by the trustee to the SC, the first one is registration to be a trustee for a unit trust fund and
second the renewal of trustee’s registration.

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7.3 REAL ESTATE INVESTMENT TRUST

Guideline for Islamic Real Estate Investment Trusts

Date issued: 21 November 2005

INTRODUCTION

1. These are the guidelines as outlined by the Shariah Advisory Council (SAC)
of the Securities Commission to facilitate the establishment of an Islamic real estate
investment trust (Islamic REIT).

2. These guidelines must be adhered to by the market players in the process of

establishing an Islamic REIT. It must be read together with the Guideline on Real
Estate Investment Trusts.

Guideline for Islamic real estate investment trusts:

1. Rental of Real Estate Rental of Real Estate RENTAL OF REAL ESTATE

BY ISLAMIC REIT FOR BUSINESS PURPOSES

1.1 Acquiring real estate with real tenant(s)

(a) Syariah-compliant assessment must be carried out by the appointed Syariah

committee/Syariah adviser to assess any property to be acquired by an Islamic REIT.
In general, an Islamic REIT is a collective investment scheme in real estate, in which
the tenant(s) operates permissible activities according to the Syariah. However, in the
event that the tenant(s) is found to operate non-permissible activities, the fund
manager for the Islamic REIT must perform additional compliance assessments;

(b) The fund manager must obtain the rental from each non-permissible activity
operating at the property to be acquired. Rental from each non-permissible activity
must be added to obtain the total rental from non-permissible activities. The list of
non-permissible activities, as decided by the Syariah Advisory Council (SAC) of the
Securities Commission, is attached in the Appendix;

20
(c) Subsequently, the total rental from non-permissible activities will be
compared to the total turnover of the Islamic REIT (latest financial year) to obtain the
percentage of rental from non-permissible activities. The percentage amount will be
referred to the 20% benchmark as determined by the SAC for the criteria on rental
from non-permissible activities;

(d) In the event that the percentage exceeds the benchmark, the Syariah
committee/Syariah adviser shall advise the Islamic REIT fund manager not to invest in
the said real estate; and

(e) However, an Islamic REIT is not permitted to own real estate, for example, a
building, in which all the tenants operates non-permissible activities, even if the
percentage of rental from that building to the total turnover of the Islamic REIT is still
below the benchmark (20%). This is to protect the image of the Islamic REIT.

These guidelines are not applicable to real estate used for residential purposes.

1.2 Renting out real estate to a new tenant(s)

The Syariah committee/Syariah adviser must advise the Islamic REIT fund manager
not to accept a new tenant(s) whose activities are fully non-permissible.

1.3 Method for calculating the portion of rental of non-permissible activities

from the total rental paid by a tenant(s) operating mixed activities )non-permissible
and permissible activities)

(a) Calculation of the rental of non-permissible activities from a tenant(s)

operating mixed activities can be based on the ratio of area occupied for non-
permissible activities to the total area occupied. The percentage will be used as the
basis for determining the ratio of rental of non-permissible activities to total rental
paid by the tenant(s); and

21
(b) For activities that do not involve the usage of space, such as service-based
activities, the calculation method will be based on the ijtihad2 of the Syariah
committee/Syariah adviser of the Islamic REIT.

2. INVESTMENT, DEPOSIT AND FINANCING FOR ISLAMIC REIT

2.1 An Islamic REIT must ensure that all forms of investment, deposit and
financing instruments comply with the Syariah principles.

Two (2) ijtihad is the process of reasoning by Islamic jurists to obtain legal rulings
from the sources of Syariah.

3. INSURANCE

3.1 An Islamic REIT must use the Takaful schemes to insure its real estate. If
the Takaful schemes is unable to provide the insurance coverage, then the Islamic
REIT is permitted to use the conventional insurance schemes.

4. FORWARD SALES OR PURCHASES OF CURRENCY FOR RISK

MANAGEMENT

4.1 An Islamic REIT is permitted to participate in forward sales or purchase of

currency, and is encouraged to deal with Islamic financial institutions, then it will be
bound by the concept of (only one party is obligated to fulfil his
promise/responsibility). The party that is bound is the party that initiates the promise.
However if the Islamic REIT deals with conventional financial institutions, it is
permitted to participate in the conventional forward sales or purchases of currency.

22
Appendix

Rental Activities that are classified as Non-permissible:-

• Financial services based on riba’ (interest)

• Gambling/gaming

• Manufactures or sales of non-halal or related products

• Conventional insurance

• Entertainment activities that are non-permissible according to the Shariah

• Manufacture or sale of tobacco-based products or related products

• Stockbroking or share trading in Shariah-compliant securities; and

• Hotels and resorts

Apart from the activities listed above, the Syariah committee/Syariah adviser can
apply ijtihad for other activities that may deemed non-permissible to be included as a
criterion in assessing the rental income for the Islamic REIT.

23
8.0 GUIDELINES ON DEBT
8.1 ISLAMIC SECURITIES

INTRODUCTION

Any person who issues, offers for subscription or purchase, or makes an invitation to
subscribe for or issue, Islamic securities would require the approval of the SC under section
32 of the Securities Commission Act 1993 (SCA). For the purposes of these guidelines, the
SC’s approval would not be required if the transaction is exempted under the Schedule 1 of
SCA. These guidelines stipulate the criteria which must be met with regard to any issue, offer
or invitation of Islamic securities which comes under the ambit of SCA. Any person who
seeks the approval of SC under these guidelines should also ensure that such person complies
with the registration and disclosure requirements in respect of prospectuses and trust deeds as
may be applicable under SCA.

For the purpose of these guidelines;

The term “Islamic Securities” means any securities issued pursuant to any Shariah
principles and concepts approved by Shariah Advisory Council (SAC) as below:

I. Primary principles

a. Deferred-Payment Sale [Bai’ Bithaman Ajil (BBA)]

A contract that refers to the sale and purchase transaction for the financing of an asset
on a deferred and an instalment basis with a pre-agreed payment period. The sale price
will include a profit margin.

b. Sale and Repurchase [Bai’ Wafa’]

A contract with the condition that when the seller pays back the price of goods sold,
the buyer returns the goods to the seller.

c. Leasing [Ijarah]
A manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or
an equipment to its client at an agreed rental fee and pre-determined lease period upon

24
 the`aqad (contract). The ownership of the leased equipment remains in the hands of
the lessor.
d. Benevolent Loan [Qardh Hasan]
A contract of loan between two parties on the basis of social welfare or to fulfill a
short-term financial need of the borrower. The amount of repayment must be
equivalent to the amount borrowed. It is however legitimate for a borrower to pay
more than the amount borrowed as long as it is not stated or agreed at the point of
contract.

II. Supplementary concepts and principles

a. Debt Trading [Bai’ Dayn]

A transaction that involves the sale and purchase of securities or debt certificates that
conforms with Syariah. Securities or debt certificates will be issued by a debtor to a
creditor as an evidence of indebtedness.

b. Open-Bidding Trading [Bai’ Muzayadah]

An action by a person to sell his asset in the open market through a bidding process
among potential buyers. The asset for sale will be awarded to the person who has
offered the highest bid/price. This is also known as the sale and purchase transaction
based on tender.

c. Guarantee [Kafalah]
A contract of guarantee whereby a guarantor underwrites any claim and obligation that
should be fulfilled by an owner of the asset. This concept is also applicable to a
guarantee provided on a debt transaction in the event a debtor fails to fulfill his debt
obligation. The same definition can be applied for Dhaman.

d. Rebate [Ibra’]
An act by a person to withdraw his rights to collect payment from a person who has
the obligation to repay the amount borrowed from him.

e. Pre-Agreed Contract [Ittifaq Dhimni]

25
 A sale and re-purchase of the underlying asset of which the prices are agreed by the
parties prior to the completion of the contract. This is an external agreement which
must be reached before the contract can be concluded to allow for the bidding process
(Bai` al-Muzayadah) to take place.

These guidelines also explained where any Shariah principles or concept applied in the
structuring of an issue, offer or invitation is based on a principle or concept other than which
is stated, the approval of SAC must be obtained prior to any submission of declarations and
information to the SC. A public company should also ensure that the requirements in all other
guidelines issued by SC, where applicable, are compiled with in respect of all corporate
transactions undertaken by it. For Islamic securities issued pursuant to an asset-backed
securitisation transaction, the Guidelines on the Offering of Asset-Backed Securities will also
apply.

SUBMISSION OF PROPOSALS

Below are categories of persons that may act as principal adviser for the following types of
proposals:

a. Merchant banks, commercial banks, universal brokers or discount houses.

- All proposals for the issuance of Islamic securities that are not capable of being
converted into equity howsoever
b. Merchant banks or universal brokers
- All proposals for the issuance of Islamic securities that are capable of being
converted into equity, together with warrants and which are part of composite
scheme

OFFERINGS OF ISLAMIC SECURITIES UNDER A SHELF REGISTRATION SCHEME

Any issue, offer or invitation of Islamic securities under a shelf registration scheme
can only be made in respect of Islamic securities which falls within the definition of
“debenture” under SCA are not capable of being converted into equity howsoever and which
have no warrants attached. A person making an issue, offer or an invitation for Islamic
securities under shelf registration scheme must comply with these guidelines as well as the
Securities Commission (Shelf Registration Scheme for Debentures) Regulations 2000 and any
Guidelines in relation thereto.

26
DOCUMENTS OR INFORMATION REQUIRED

In relation to any issue, offer or invitation made pursuant to these Guidelines, the
issuer and principal adviser must submit to the SC such documents and information as well as
declarations as set out below:

 Information to be Submitted for the Purpose of Obtaining the Approval of the SC

1. Application letter
2. Principal Terms and Conditions of the Proposal
3. Principal Terms and Conditions of Warrants, in the case of an Islamic Securities issue
with warrant; and etc

 Information to be Submitted After Obtaining the Approval of the SC

- In the case of Islamic securities programmes, Issuer’s notification to the SC of the
following information following each draw-down:
a. Size of issue;
b. Mode of issue;
c. Utilisation of proceeds;
d. Minimum level of subscription (where applicable);
e. Tenor; and etc.

 Principal Terms and Conditions of the Proposal

A. Background Information
a. Issuer
i. Name
ii. Address
iii. Business registration no.
iv. Date/place of incorporation
v. Date of listing (in case of a public listed company) and etc.
b. Originator (in the case of asset-backed securities
i. Name
ii. Address

27
 iii. Business registration no.
iv. Date/place of incorporation; and etc.
B. Principal Terms and Conditions
a. Names of parties involved in the proposed transaction (where applicable)
b. Islamic principle used
c. Facility description
d. Issue size (RM)
e. Issue price; and etc.

Additionally, where the Issues Guidelines would apply to an issue, offer or invitation
of Islamic securities by public company, the issuer and principal adviser shall submit such
additional information and documents as may be required under Issue Guidelines. The SC
may also require additional information from the issuer and its principal adviser, including
due-diligence reports and rating reports if applicable, for post vetting purposes at any time.

ELIGIBLE PERSONS

Any person who is a corporation within the meaning of subsection 2(1) of the SCA is
eligible under these Guidelines. Corporation means any body of corporate or incorporated or
existing formed within Malaysia or outside Malaysia and includes any foreign company but
does not include;

a. Any body corporate that is incorporated within Malaysia and is by notice of the
Minister published in the Gazette declared to be a public authority or an
instrumentality or agency of the public Government of Malaysia or of any State or to
be a body corporate which is not incorporated for commercial purposes;
b. Any corporate sole;
c. Any society registered under any written law relating to co-operative societies;

APPOINTMENT OF SHARIAH ADVISER

In relation to Islamic Securities that comes within the ambit of the Guidelines, the
issuer must appoint either;

a. An independent Shariah adviser who has been approved by SC and who meets the
following criteria;
- Is not an undercharged bankrupt

28
 - Has not been convicted for any offence arising out of criminal proceeding
- Is of good repute and character
- Possesses the necessary qualifications and expertise particularly in fiqh muamalat
and Islamic jurisprudence, and has minimum of 3 years’ experience or exposer in
Islamic finance; or
b. An Islamic bank or a licensed institution approved by Bank Negara Malaysia to carry
out Islamic Banking Scheme or Skim Perbankan Islam

To advise on all aspects of Islamic securities including documentation, structuring,

investment as well as other administrative and operational matters in relation to Islamic
securities, and ensure compliance with applicable Shariah principles and relevant resolutions
and rulings made by SAC from time to time. In the event of doubt, clarification should be
sought from SAC where the applicant for independent Shariah adviser must engage at least
one Shariah expert who meets the criteria.

OTHER REGULATORY APPROVALS

All necessary approvals in relation to the issue, offer or invitation from other
regulatory bodies including Controller of Foreign Exchange, must be obtained prior to the
submission of any written declarations and information to the SC under these Guidelines. Any
condition imposed by such regulatory bodies, if applicable, must continue to be complied with
throughout the tenor of Islamic Securities approved under these Guidelines.

RATING REQUIREMENT

All issues, offers or invitations that come within the scope of these Guidelines must be
rated by rating agency recognised by SC. An indicative rating must have been obtained by the
issuer at the time of submission of the declarations and information to the SC.

A rating is not required for any issue, offer or invitation of Islamic securities; which
are non-transferable and non-tradable and whose investors do not require a rating. The
principal adviser must confirm in writing to the SC that both criteria have been met.

Where the credit rating of any issue, offer or invitation is below investment grade, the
issuer must disclose the extent of credit risk to investors and their advisers in order to evaluate
risks relating to Islamic Securities.

UNDERWRITING

29
 The underwriting of any issue, offer or invitation shall be decided by issuer and its
principal adviser. In the event that the issuer and its principal adviser should decide that no
underwriting or only partial underwriting is required, the issuer must state the minimum level
of subscription necessary to achieve the funding objectives of the issue. It does not apply
where; the utilisation of proceeds is solely for working capital purpose and the issuer has in
place alternative funding arrangements.

Unless otherwise allowed in writing by SC, where any issue, offer or invitation is
under-subscribed and cannot meet the minimum level of subscription, the issue, offer or
invitation must be aborted and any consideration received for the purpose of subscriptions,
where applicable, must be immediately returned to all subscribers.

MODE OF ISSUE

All issues of Islamic securities under these Guidelines must be reported and/or
tendered on Fully Automated System for Issuing/tendering (FAST) unless a listing is sought
on any Malaysian stock exchange. The issuer and principal adviser must ensure that issue
complies with all rules and requirements of FAST.

All issues of Islamic securities that subjected to these Guidelines must be made under
Real Time Electronic Transfer of Funds and Securities (RENTAS) system unless a listing is
sought on any Malaysian stock exchange. The issuer and principal adviser must ensure that
issue complies with all rules and requirements of RENTAS system.

TIME FRAME FOR APPROVAL FROM SC

The SC would give its approval within 14 working days from the date of receipt of all
declarations, complete information and documentation as required under these Guidelines in
the following cases:

a. Any issue, offer or invitation in respect of Islamic securities that is not capable of
being converted into equity howsoever;
b. Any issue, offer or invitation in respect of Islamic securities, together with warrants,
that are not capable of being converted into equity howsoever; and
c. Any issue, offer or invitation of Islamic securities by a private company.

In circumstances where the Issues Guidelines would apply to the issue, offer or
invitation of Islamic securities, the time frame for approval by the SC set out under those

30
Guidelines would apply. Except in the case of a shelf registration scheme or an Islamic
securities programme, any approval given by the SC under these Guidelines must be
implemented within 6 months from the date of the SC’s approval. As well as in the case of a
shelf registration scheme or an Islamic securities programme, the initial draw-down must be
made within 2 years from the date of the SC’s approval.

31
 8.2 ASSET- BACKED SECURITY

Guideline on the Offering of Asset-Backed Securities (ABS Guidelines)

Date issued: 12 September 2001

Revised Edition: 26 July 2004

Effective date: 26 July 2004

INTRODUCTION

Securitisation brings much benefit to both issuers and investors. For issuers, it potentially
offers cheaper and more efficient funding for operations combined with greater balance sheet
flexibility. For investors, securitisation provides a broad selection of fixed income alternatives.
In order to facilitate the issuance of asset-backed securities in the Malaysian capital market,
the Guidelines on the Offering of Asset-Backed Securities sets out clear and transparent
criteria for securitisation transactions as required by the SC pursuant to section 32 of the
Securities Commission Act 1993 (SCA).

INTERPRETATION

In these Guidelines, unless the context otherwise requires, the following words and
expressions shall have the following meaning;

1. Asset-backed securities or ABS

Means private debt securities or Islamic securities that are issued pursuant to a securitisation
transaction. Such securities shall exclude all debt securities or Islamic securities that are
capable of being converted into equity howsoever and whether redeemable or otherwise.
Examples of such excluded securities include exchangeable bonds and private debt securities
or Islamic securities with attached warrants.

2. Assets

Refers to such assets which are the subject matter of a securitisation transaction and which
satisfy all criteria as stipulated in these guidelines.

32
3. Credit enhancement

Refers to one or more arrangements within a securitisation transaction to enhance the credit
rating of the ABS issue by, for example, the provision of a cash collateral, profit retention,
third party guarantee, over collateralisation etc.

4. Originator

Refers to any that is seeking to transfer or dispose of its assets to a special purpose vehicle in
a securitisation transaction.

5. Securitisation transaction

Means an arrangement which involves the transfer or risks to a third party where such transfer
is funded by the issuance of debt securities or Islamic securities to investors. Payments to
investors in respect of such debt securities or Islamic securities are principally derived,
directly or indirectly, from the cash flows of the assets.

6. Servicer

Refers to any entity that is undertaking to administer the assets or perform such other services
on behalf of the special purpose vehicle as may be required in a securitisation transaction.

7. Special purpose vehicle

Means any entity which issues asset-backed securities and which satisfies all criteria
stipulated under these guidelines

Guidelines on the Offering of Asset-Backed Securities (ABS)

1. REQUIREMENTS FOR ASSETS THAT MAY BE SECURITISED

1.1 The assets that are the subject matter of a securitisation transaction mst fulfil all of the
following criteria:-

(a) The assets must generate cash flow;

(b) The originator has a valid and enforceable interest in the assets and in the cash flows
of the assets prior to any securitisation transaction;

33
(c) There are no impediments (contractual or otherwise) that prevent the effective transfer
of the assets or the rights in relation to such assets from an originator to an SPV. For example-

i. That the necessary regulatory or contractual consents have been obtained in order to
effect the transfer of such assets from an Originator to an SPV;

ii. That the originator has not done or omitted to do any act which enables a debtor of the
Originator to exercise the right of set-off in relation to such assets;

(d) The assets are transferred at a fair value;

(e) No trust or third party’s interest appears to exist in competition with an originator’s
interest over the assets; and

(f) Where the interest of an originator in the assets is as charge, the charge must have
been created for a period of more than six months before the transfer

1.2 Where the issue, offer or invitation of ABS is Islamic in nature, the assets that are the
subject matter of the securitisation transaction must be acceptable in accordance with Syariah
principles. In the event of doubt, clarification should be sought from the Syariah Advisory
Council of the SC.

2. THE ORIGINATOR

2.1 An originator must be an entity incorporated in Malaysia

2.2 An originator must be a going concern at the date of transfer of any assets to an SPV. For
the purposes of these guidelines, an originator will not be considered as a going concern if it
is unable to pay any of its debts as they fall due or when it suspends payment of any of its
debt obligations.

2.3 Any transfer of assets by an originator to an SPV must comply with the true sale criteria
that are set out in section 6 of these guidelines.

2.4 Save for paragraph 2.5, the originator may only purchase ABS issued by an SPV up to
10% of the original amount of the ABS issued by the SPV at market value at any time unless

34
otherwise permitted by the SC. These guidelines do not impose any limits with respect to the
holdings of subordinated securities by an originator.

2.5 Where an originator is the only primary subscriber resulting in the originator holding more
than 10% of the ABS, the originator must make best endeavours to place out such excess ABS
within a period of not more than three months from the date of issuance of such ABS.

2.6 An originator should also have internal systems to ensure that funds due to the SPV are
separated and “ring-fenced” from other funds due to the originator as soon as practicable.

3. TRUE SALE CRITERIA

3.1 The underlying assets must have been isolated from an originator i.e. put beyond the
reach of the originator and its creditors even in receivership or bankruptcy as far as possible.

3.2 The risk that a transfer of assets by an originator to an SPV might be re-characterised as a
financing transaction rather than a sale of assets should be minimised as far as possible. In this
regard, the originator must effectively transfer all rights and obligations in the underlying
assets to the SPV.

3.3 An originator must not hold any equity stake, directly or indirectly, in an SPV. In addition,
the originator must not be in a position to exercise effective control over the decisions of the
SPV in relation to the securitisation transaction.

3.4 An SPV must have no recourse to an originator for losses arising from those assets
save for any credit enhancement provided by the originator at the outset of the securitisation
transaction.

3.5 Where an originator is also the servicer, the services must be provided on an arm’s length
basis, on market terms and conditions. In addition, there must be no obligation imposed on the
originator to remit funds to the SPV unless and until they are received from the debtor of the
originator in respect of the underlying assets.

3.6 Notwithstanding the provisions of paragraphs 3.1 to 3.5:

35
(a) Where such assets have declined to a level that renders the asset securitisation
transaction uneconomical to carry on, an originator may retain a first right of refusal to
repurchase assets from an SPV at a fair value; or

(b) The originator may repurchase assets from the SPV where the originator is under an
obligation to do so under a securitisation transaction when it has breached any conditions,
representation or warranty in respect of the securitisation transaction.

4. THE SPECIAL PURPOSE VEHICLE (SPV)

4.1 An SPV must be resident in Malaysia for tax purposes.

4.2 An SPV must have independent and professional directors or trustees as the case may be.

4.3 In determining whether an SPV is sufficiently “bankruptcy remote”, the following must be
taken into account:

(a) An SPV cannot include in its objectives, the power to enter into any other activities
that are not incidental to its function as a special purpose vehicle in relation to the
securitisation transaction;

(b) An SPV must sub-contract to third parties all services that may be required by it in
order to maintain the SPV and its assets;

(c) An SPV is not permitted to have employees or incur any fiduciary responsibilities to
third parties other than to parties involved in the securitisation transaction; and

(d) All the liabilities, present or future, of an SPV (including tax) must be quantifiable and
capable of being met out of resources available to it.

4.4 An SPV must be responsible for the acts and omissions of all persons to whom it
delegates any of its functions. Thus, an SPV is ultimately responsible to ensure that its assets
are managed with due care and in the best interests of ABS holders.

36
4.5 Without prejudice to any applicable law, an SPV must cause to be maintained proper
accounts and records to enable a complete and accurate view to be formed of its assets,
liabilities, income and expenditure and to comply with all other regulatory reporting
requirements in respect of the issue, offer or invitation of ABS.

4.6 An SPV must be dissolved when the following circumstances arise:

(a) It refuses to accept transfers of the assets or issue ABS within six months from the
date on which the securitisation transaction is approved by the SC or such other period as may
be specified by the SC; or

(b) More than 75% of ABS holders have resolved, in accordance with the terms and
conditions agreed by all the relevant parties in a securitisation transaction, that the SPV shall
be dissolved and the SC has been notified of this resolution. In addition, more than 50% of the
senior classes of ABS holders must consent to the dissolution; or

(c) Upon full repayment of the ABS in accordance with the terms and conditions of the
securitisation transaction.

4.7 Where an SPV is constituted as a trust, the SPV need not comply with the “eligible
persons” provision under paragraph 2 of the PDS Guidelines.

5. ADDITIONAL TRUST DEED REQUIREMENTS

5.1 In addition to the requirements imposed under the Guidelines on Minimum Content

Requirements for Trust Deeds, the trust deed documentation in any securitisation transaction
must also provide for the following:

(a) Covenants should be imposed on an SPV which give effect to the requirements of
these guidelines on the “bankruptcy remoteness” status of the SPV; and

37
(b) That the trustee shall be entitled to appoint a receiver in respect of the underlying
assets of the SPV in default circumstances as may be provided for in the trust deed.

6. DISCLOSURE REQUIREMENTS

6.1 Where a prospectus is not required, an information memorandum must be made available
to the investors in relation to any issue, offer or invitation of ABS. The information
memorandum must contain the following minimum information:

(a) Risk factors of investing in the ABS;

(b) Detailed description of the structure of the securitisation transaction and all significant
agreements relevant to the structure;

(c) Corporate profile of all parties involved;

(d) Detailed description of the securitised assets including the cash flow profile, ageing of
cash flows, and (if available) historic levels of arrears or rates of default for the portfolio of
assets and stress levels of cash flows;

(e) An explanation on the flow of funds stating-

i. how the cash flow from the assets is expected to meet an SPV’s obligations to ABS
holders;

ii. an indication of any investment parameters for the investment of temporary liquidity
surpluses;

iii. how payments are collected in respect of the assets;

iv. the order of priority of payments to the holders of different classes of private debt
securities or Islamic securities;

v. details of any other arrangements upon which payments of interest or profit and
principal to investors are dependent;

vi. information regarding the accumulation of surpluses in an SPV; and

vii. details of any subordinated securities;

38
(f) Measurement of the fair value of securitised assets including the methodology used in
determining such fair value and the key assumptions involved;

(g) Terms and conditions of the ABS;

(h) Information on credit enhancement and liquidity facilities, if any, provided to the
securitisation transaction including an indication of where material potential shortfalls are
expected to occur;

(i) Rating(s) for the ABS and the definition of the rating(s);

(j) Any fee payable by an SPV including management fees and expenses charged by the
servicer; and

(k) An explanation of any matter of significance to investors relating to the issue, offer or
invitation of ABS that would enable investors to make an informed decision.

6.2 The SPV and the ABS issued by the SPV must not carry the same name as the originator
or be similarly identified with the originator.

6.3 Where an originator is a licensed financial institution, investors must be clearly informed
that the securities that they invest in do not represent deposits or continued liabilities of the
licensed financial institution.

6.4 Investors must be clearly informed that an originator does not in any way stand behind the
ABS issued by the SPV except to the extent specified in the asset securitisation
documentation and such credit enhancement as may be provided by the originator.

6.5 Where an Originator intends to subscribe or tender for the ABS, this must be clearly
disclosed to investors.

7. SERVICER

7.1 The duties of any servicer of the assets must include the following:

39
(a) The servicer must keep proper accounts;

(b) The trustee must be informed of any change of servicer;

(c) The servicer must have adequate operational systems and resources to administer the
asset portfolio. In particular, these internal systems should ensure that the cash flows
belonging to the SPV are "ring-fenced" and segregated in relation to a securitisation
transaction; and

(d) Where there is any change of servicer, provision must be made in the legal
documentation for the periodic transfer of the necessary information from the originator to the
substitute servicer to enable the monitoring of the asset portfolio, its performance analysis and
collections from debtors of the originator.

8. SUBMISSION OF APPLICATION TO THE SC

8.1 The application for approval of the securitisation transaction must, in addition to the
requirements specified in the PDS Guidelines, include the following:

(a) A description of the structure of the securitisation transaction;

(b) The preliminary rating report;

(c) A copy of the constituent document, such as the Memorandum and Articles of
Association of an SPV;

(d) A legal opinion as to whether the true sale criteria has been met;

(e) A copy of all other required regulatory approvals;

(f) A valuation report by independent, registered valuers in the event that the assets which
are the subject matter of a securitisation transaction include real property;

(g) Compliance checklist on the ABS, PDS and IS Guidelines by principal advisers; and

40
(h) All duly executed declarations as per Appendix 1 of these guidelines which shall
supersede the required declarations under the PDS and IS Guidelines, where applicable.

8.2 Where the issue, offer or invitation of ABS is Islamic in nature, such issue, offer, or
invitation must continue to comply with the IS Guidelines.

9. TIME FRAME FOR APPROVAL FROM THE SC

9.1 The SC would give its approval within 28 working days from the date of receipt of all
declarations, complete information and documentation required under these Guidelines.

9.2 Where the Policies and Guidelines on Issue/Offer of Securities (Issues Guidelines) would
also apply to a securitisation transaction, the time frame for approval stated in paragraph 9.1
shall not apply.

10. OTHER REGULATORY APPROVALS

10.1 All necessary approvals in relation to the issue, offer or invitation of ABS from other
regulatory bodies must be applied for and approved prior to the submission of any written
declarations and information made to the SC under these guidelines. Any condition imposed
by such regulatory bodies, if applicable, must continue to be complied with throughout the
tenor of the ABS approved under these guidelines.

41
 8.3 DEBT MINIMUM CONTENT TRUST DEEDS

INTRODUCTION

With effect from 1 July 2000, a person issuing, offering or making an invitation of
debenture and Islamic securities (or sukuk) is required to enter into a trust deed, unless the
issue, offer or invitation is exempted under Schedule 8 of the Capital Markets and Services
Act 2007 (CMSA) which is attached as Appendix 1 for ease of reference. The trust deed shall
contain the minimum provisions, covenants, requirements, information and particulars which
are specified by the Securities Commission Malaysia (SC) in these guidelines.

The legal requirements stated in paragraph above are provided under Division 4 of
Part VI of the CMSA, which was previously set out in Division 4 of Part IV of the Securities
Commission Act 1993 (SCA). These guidelines are issued under section 377 of the CMSA.
These guidelines supersede the Guidelines on the Minimum Contents Requirements for Trust
Deeds dated 1 July 2000 with the main objective of enhancing disclosure and protection to the
debenture and sukuk holders.

The requirements stated in these guidelines are in addition to all requirements imposed
on a borrower or issuer, guarantor and trustee under the law which includes the provisions of
the CMSA. It is not intended for these guidelines to derogate from any requirement of the
law.

These guidelines do not seek to impose worded clauses in any trust deed in relation to
debentures or sukuk. Therefore, parties are free to determine additional provisions, covenants
or terms and conditions of debentures or sukuk and/or trust deeds over and above that
stipulated in these guidelines, provided that such addition does not in any way contravene
with the minimum contents requirements as specified in these guidelines.

Listed corporations should additionally comply with such requirements pertaining to

trust deeds as imposed by listing requirements and any other rules of a stock exchange. For
issuance, offer or invitation of sukuk which involves a special purpose vehicle as an issuer or
offeror, the requirements stated in these guidelines on the issuer or offeror shall apply, where
applicable, to the obligor.

42
INTERPRETATION

In these guidelines, the following words and expressions shall have the following
meanings, unless the context requires otherwise. These words are taken from the Equity
Guideline, CMSA, Companies Act 1965 and SC 1993.

SCOPE

Under section 258 of the CMSA, any person who proposes to issue, offer for
subscription or purchase, or issue an invitation to subscribe for or purchase, debentures or
sukuk, must enter into a trust deed that meets the minimum content requirements as specified
in section 259 of the CMSA. The minimum contents required are as specified in these
guidelines. However, section 258 of the CMSA does not apply to any issue, offer or invitation
of debentures or sukuk as provided in Schedule 8 of the CMSA. For such issue, offer or
invitation, the minimum contents requirements as specified in these guidelines will not be
mandatory but may be applied by the issuer to a trust deed upon considering the due interest
of its investors.

PREAMBLE AND RECITALS

The following must be provided in the preamble and recitals of the trust deed in
relation to the issue of, offer for subscription or purchase of, or an invitation to subscribe for
or purchase, debentures or sukuk, those are the identities of the parties to the trust deed, A
brief description of the debentures or sukuk including the amount, maturity or tenure, Shariah
principle (for sukuk) and interest or profit rate, where available, A statement confirming that
the relevant board and/or shareholders’ resolutions and regulatory approvals have been
obtained and the date of issue/proposed issue of the debentures or sukuk, where available, and
a statement stating the name of the system where the debentures or sukuk will be issued,
cleared and settled.

DESCRIPTION OF DEBENTURES OR SUKUK

The trust deed of the debentures or sukuk must provide the key features of the
debentures or sukuk constituted by the trust deed including the tenure, redemption schedule
and the denomination (where applicable), Details of the central depository and paying agent
for the debentures or sukuk, whether the debentures or sukuk are secured or unsecured and if
secured, the nature of the security, whether the debentures or sukuk are callable or non-

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callable before the legal maturity date of the instruments and if they are callable, details of the
call option and the ranking and voting right of the holders of debentures or sukuk among all
other holders of the debentures or sukuk and as against all other obligations of the issuer

INTEREST OR PROFIT RATE

Where provision is made for the payment of an interest or profit rate under the
debentures or sukuk, the trust deed shall state the interest or profit rate (where applicable)
payable and the frequency upon which such interest or profit payments are required to be
made, the basis of calculation and the profit sharing ratio which is applicable for sukuk, the
conditions under which the stipulated interest or profit rate and its payment terms may
change, where a default interest rate or ta’widh (for sukuk) has been agreed upon by the
parties to the trust deed, to state the rate payable on any overdue amounts and where a rebate
or ibra’ may be given and to state the circumstances where a rebate will be given and to state
the agreed rate or method in which the rate/amount will be calculated.

COVENANT TO COMPLY WITH TRUST DEED AND DEBENTURES OR SUKUK

The trust deed must include a covenant by the issuer to comply at all times with the
provisions of the trust deed and the terms and conditions of the debentures or sukuk at all
times.

ISSUER’S COVENANT TO PAY

The trust deed must provide for a covenant by the issuer to redeem or settle in full all
outstanding debentures or sukuk in accordance with the terms and conditions of the
debentures or sukuk.

TAXATION

If any withholding of taxes is required or subsequently required by law in respect of

any payment to be made under the terms and conditions of the debentures or sukuk, the trust
deed shall state the details of the obligation of the issuer with regard to such withholding.

DEBENTURE OR SUKUK CERTIFICATES

The trust deed shall provide the details and particulars relating to the global certificate
representing the debentures or sukuk and the conditions under which the trustee may
exchange the global certificate with definitive certificates.

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LIMITATION ON BORROWING

Where there is a limitation on the total amount of borrowing or financing by the issuer,
the trust deed must provide the detailed formula governing the limitation and the detailed
meanings or definition of each component in the formula in order to facilitate computation
and verification of such limitation from time to time. For this limitation, the trust deed must
provide for a report which shall be submitted at least annually by the issuer to the trustee. The
report must state whether or not the said limitation has been complied with as well as
providing for relevant details (including detailed computation for such limitation) of the
compliance or non-compliance.

EVENTS CONSTITUTING DEFAULT AND REMEDY OF SUCH DEFAULT

A list of all events, the occurrence of any of which would entitle or oblige the trustee
to declare the debentures or sukuk immediately due and payable. For debentures or sukuk
which are issued by a licensed banking institution to raise its Tier-I and Tier-II regulatory
capital in accordance with the guidelines issued by the Bank Negara Malaysia (BNM).
However, in the event of a default in payment of any principal, premium, interest or profit
under the debentures or sukuk, the trust deed must provide for an enforcement event for the
winding up of the banking institution.

SINKING FUND

Where the parties agree to the maintenance of a sinking fund, the trust deed shall
provide for the obligation to maintain a bank account, the amounts to be paid into the account
and the dates such payments are required to be made and the conditions under which the
moneys in the account may be withdrawn by the issuer and used or applied by the trustee for
the benefit of debentures or sukuk holders.

COVENANTS BY THE ISSUER

At minimum and so long as any debentures or sukuk remain outstanding, the trust
deed must provide the following covenants in relation to the issuer. The issuer will give to the
trustee any information which the trustee may reasonably require in order to discharge its
duties and obligations under the trust deed relating to the issuer’s affairs to the extent
permitted by law.

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 The issuer will exercise reasonable diligence in carrying out its business in a proper
and efficient manner which shall ensure, among others, that all necessary approvals or
relevant licences are obtained and maintained.

ISSUE/EXCHANGE OF SHARES IN RELATION TO

CONVERTIBLE/EXCHANGEABLE DEBENTURES OR SUKUK

In the case of convertible debentures or sukuk, the trust deed or the terms and
conditions of the debentures or sukuk must state the terms, procedures and notices of
conversion, where the issuer reserves the right to issue shares or other securities to
shareholders or to any other persons for cash or as a b onus distribution or otherwise, that the
holders of the debentures or sukuk must have either participation rights in respect of such
issue or provision must be made for an appropriate adjustment of the conversion price to
ensure that the conversion privilege of the debentures or sukuk holders is not dilute, if the
holders of the debentures or sukuk have any right to convert the debentures or sukuk into
shares in the event of a take-over offer in relation to the issuer, or how the holders of the
debentures or sukuk might participate in such a take-over offer, the conditions under which an
option to convert the debentures or sukuk into shares of the issuer is exercised

REPORTING COVENANTS BY THE ISSUER

The trust deed shall include covenants to ensure that the issuer shall immediately
notify the trustee if the issuer becomes aware of any event of default. If happening of any
event that has caused or could cause, one or more of the following any amount secured or
payable under the debenture or sukuk to become immediately payable,the debenture or sukuk
to become immediately enforceable or any other right or remedy under the terms, provisions
or covenants of the debenture or sukuk or the trust deed to become immediately enforceable.

APPLICATION OF MONEYS RECEIVED IN RESPECT OF THE DEBENTURES OR

SUKUK

Where there any moneys received by the trustee under the trust deed, the trust deed
shall stipulate the manner and order of priority in which these amounts are applied or payable.
In case where the moneys are disbursed to the issuer conditionally over a period of time by
the trustee, the trust deed shall provide the relevant thresholds, conditions, supporting
documents and certificates for the trustee to manage the release of the moneys to the issuer.

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POWER TO WITHHOLD, INVEST AND ACCUMULATE

Where there is any discretion by the trustee to withhold, invest or accumulate moneys
it receives, this must be stated in the trust deed. Where the trustee is allowed to invest, any
moneys received by the trustee, the conditions under which it is permitted to do so and the
types of investment the trustee is permitted to invest in must be stated in the trust deed.

DEPOSIT OF UNCLAIMED MONEYS

There must be a provision with regard to the rights and obligations of the parties in
relation to any unclaimed moneys due to the debentures or sukuk holders.

POWERS AND DUTIES OF TRUSTEE

The trust deed shall contain a statement by the trustee that it is approved by the SC to
act as trustee under the CMSA. The trust deed shall set out provisions relating to the powers
of the trustee. These shall include the matters which are within the powers of the trustee to
decide without reference to the holders of the debentures or sukuk.

RELIEF, EXEMPTION AND INDEMNIFICATION OF TRUSTEE FROM LIABILITY

There shall be a provision in the trust deed that states that no provision or covenant in
the trust deed or the terms and conditions of the debentures or sukuk shall be construed as
relieving, exempting or indemnifying a trustee from liability for breach of trust or for failure
to show a degree of care and diligence required of it as trustee.

MEETINGS

There shall be a provision in the trust deed setting out the notice period for the meeting
of debentures or sukuk holders. There shall be a provision in the trust deed stating that the
meetings may be convened at the request of the issuer, trustee or an agreed percentage of
debentures or sukuk holders. There shall be a quorum requirement for the transaction of
business at the meetings and the provision deed.

CANCELLATION OF DEBENTURES OR SUKUK

The trust deed shall provide for debentures or sukuk which are redeemed or purchased
by the issuer or by its subsidiaries or by agent(s) of the issuer who is acting for the redemption
or purchase, to be cancelled by the issuer and could not be resold.

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MISCELLANEOUS CLAUSES

The trust deed shall stipulate the conditions under which the provisions of the trust
deed or the terms and conditions of the debentures or sukuk may be modified, mode of service
of notices and other documents on the issuer, the trustee and the holders of the debentures or
sukuk, which may include a p rovision for the trustee to notify debentures or sukuk holders by
way of a notice published in national newspapers in the main languages, published daily and
circulating generally throughout Malaysia, the issuer to be responsible for paying any stamp
duty on the trust deed or the debentures or sukuk and the applicable governing law.

SCHEDULES

There shall be schedules to stipulate the form and the terms and conditions of the
global certificate representing the debentures or sukuk, form and the terms and conditions of
the definitive certificate representing the debentures or sukuk and the provisions regulating
the convening and holding of meetings of the holders of debentures or sukuk

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9.0 CONCLUSION

The Malaysian Islamic Capital Market is growing rapidly vibrantly.

At present, Malaysia faraway exceed other Muslim countries in term of capital market
infrastructure with persistent support by the government providing impulsion for the growth
of Malaysian Islamic Capital Market.

All parties either the regulatory bodies or the market players involved to ensure the
achievement of an international hub for an Islamic Capital Market.

In addition, it is a continuous effort whereby all aspect is being reviewed by the

respective bodies.

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10.0 REFERENCES

 Dynamics of Islamic debt in infrastructure financing.(2005, April). Retrieved from

The Star Online: https://www.thestar.com.my/
 Guidelines on Islamic Fund Management.(2007, December). Retrieved from
Securities Commissiom: https://www.sc.com.my/
 Guidelines on Offering Islamic Securities.(2007, March). Retrieved from Securities
Commision: https://www.sc.com.my/
 Principles of Islamic Capital Market.(2013, October). Retrieved from International
Journal of Academic Research in Accounting, Finance and Management Science:
http://hrmars.com/
 Guidelines on Offering Asset-backed Securities (ABS) (2001). Retrieved from
Securities Commission: https://www.sc.com.my/

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